At first glance, the annualised growth of 3% in US gross domestic product suggests that the US economy is in excellent shape. However, a closer look reveals that this growth is mainly due to the slump in imports, which had caused GDP to contract in the previous quarter. Such fluctuations are likely to be a direct result of the US president's negotiating tactics in trade matters. The eurozone also exceeded expectations with growth of 0.1%, which was significantly more modest than in the US. In the second half of July, both Japan and the EU concluded trade agreements with the US that provide for a 15% tariff on imports into the US for both Japan and the EU. The tariffs are thus significantly lower than the rates originally threatened (25% for Japan and 30% for the EU) – in contrast to the rate for Switzerland, which is very high at 39%. On the surface, the agreements appear to be good deals for the US, as the American government is profiting from imports. Ultimately, however, the tariffs are likely to lead to higher prices for American consumers and hamper growth in both the US and its trading partners. Both the European Central Bank (ECB) and the US Federal Reserve left their key interest rates unchanged at 2.15% and 4.25%–4.5% respectively. The ECB justified its decision on the one hand with uncertainty about further economic developments and on the other hand with the fact that consumer price inflation, at 2%, is currently in line with the ECB's target. In our view, the US central bank is facing much greater uncertainty with regard to US trade policy and its possible effects. The fact that it is not bowing to pressure from the US president is, in our opinion, a positive sign in terms of the Fed's independence. Any doubts about this would have a corresponding impact on the financial markets.
The earnings reporting season is in full swing. Most companies exceeded analysts' expectations and surprised the markets positively. The trade agreements concluded to date to avoid high tariffs also contributed to a largely positive development on the stock markets, as they removed uncertainty on the one hand and, on the other, lower tariffs were negotiated than feared. Our cautiously optimistic assessment and corresponding positioning have proven correct so far, enabling our clients to benefit above average from the rising stock markets. However, high valuations in some parts of the stock market and continuing high uncertainty regarding the global trade situation are dampening our optimism for the future somewhat. The Shiller P/E ratio for the S&P 500 exceeded its 2021 high this month. This is not a problem as long as the corresponding index heavyweights deliver quarterly results as they have done in previous quarters and years. However, if their growth flattens out, a revaluation is likely to take place in the markets. It is therefore important to maintain solid diversification and also look for quality and growth elsewhere.
Although the US dollar fell sharply in the first half of the year – by almost 11% as measured by the US dollar index – it gained a good 3.2% last month and also appreciated by 2.4% against the Swiss franc. Nevertheless, the Swiss franc remained strong in July compared with other major currencies. Also noteworthy is the price of oil, which remains an important factor in the income statements of many companies and has risen sharply over the past three months – from USD 63.1 at the end of April to USD 72.5 at the end of July for a barrel of Brent crude. Gold and silver closed higher than in the previous month and made positive contributions for our clients.
The current situation is challenging for investors. Uncertainty surrounding trade tariffs, signs of an economic slowdown and geopolitical risks from various parts of the world are causing us to be cautious. Military conflicts – as various events in recent months and years have shown – always carry the risk of high commodity prices and, as a result, rising inflation. The same is likely to apply to trade tariffs. A ‘normal’ economic slowdown, on the other hand, usually has a deflationary effect. Moreover, a surprisingly large number of companies seem to be coping relatively well with the wide range of risks so far. The spectrum of scenarios for the coming months is undoubtedly broad. A well-diversified portfolio with the right emphasis is likely to pay off once again in times like these. We have designed our asset allocation with this in mind. Compared to the beginning of the month, we are holding a slightly lower bond allocation and have slightly increased the emerging market allocation within the equity allocation, while partially hedging the US equity allocation with put options.