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The US markets continue to lead in terms of
performance for the fifth straight month. There is not much substance to
explain this continued up trend. This may be better explained by behavioral
finance. Indeed, surveys point to the good old “FOMO” (Fear Of Missing Out)
effect that was often used in 2020-2021. Investors are currently more worried about
missing the upside than the potential downside.
The revised number of rate cuts is best explained by Fed Governor Waller: “There
is no rush to cut the policy rate. Recent data tells me that it is prudent to
hold this rate at its current restrictive stance perhaps for longer than
previously thought to help keep inflation on a sustainable trajectory toward 2%”,
hence the first part of the title of this letter. Inflation has been stuck
around 3.2% for the past 9 months. As for macroeconomics, the US GDP for Q4 2023 was
revised upward to 3.4%, the composite Purchasing Managers’ Index (PMI) remains
in expansion both in manufacturing and services. All the ducks are aligned for
a blue-sky scenario. Though the European stock market is also
performing well, the economy is much less encouraging than in the US. The muted
Chinese economy, depressed manufacturing activity, unsteady consumption and
lack of liquidity in weighting more heavily on Europe in the higher rate environment.
With inflation at 2.6% in the euro area, the ECB will probably be able to cut
rates in June, with 4 cuts being priced for 2024. The big surprise came from the Swiss National
Bank, which is the first major central bank to cut rates to 1.5% from 1.75%. The
strength of the Swiss franc played an important role in fighting against
inflation (cheaper imports), the latest reading showing 1.2% versus a target of
2%. Economists expect 2 further cuts by year end. The exchange rates strongly penalized
Swiss companies, as the performance of the Swiss Market Index in 2023 clearly demonstrates.
In this context, the SNB decided to intervene, though it claims it has no
exchange rate target. Our summary recommendations Our long exposure to the stock market continues
to benefit from the market performance, but we also add downside protection to
existing structured products, as the distance from the strike increases. As bonds mature, we are reinvesting in quality
names with a duration of 2-2.5 years in order to lock a still attractive yield,
before rates go down. We continue to explore new alternative
investments, which are rather decorrelated with stock markets and provide
attractive and less volatile long-term returns, even though we already have an
overweight in this asset class.
Chart of the month
The chart of the month is replaced by a
caricature from 1981. Caricatures are meant to be an exaggeration of certain characteristics,
but it hardly seems exaggerated and shows that some things don’t change. Source: 1981 The New Yorker Magazine
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