Equity markets in the fall. Still no interest rate turnaround in sight.

Bear traps and bull markets – investing in the fall

Golden autumn or stormy fall? Buy or sell? When bears repeatedly set traps for bulls, investors ask themselves who will win the battle. An outlook for the development of equity markets in the fall.

Investing at the right time: Three reference points

  1. Historically, periods of very low unemployment, rising wages, strong economic growth, and negative yield curves were often bad times to keep buying equities.
  2. The best time to buy equities is usually the darkest hour of a crisis. It is the moment when recovery is in sight, but the crisis is still the most present.
  3. The best time for a sale is the phase in which the economy appears invincible, when risk premiums disappear, and investors believe in the advent of a golden age. 

Where are the equity markets at the moment?

At what point are we now? Probably somewhere between the two extremes. Most criteria suggest that the bull market, which has persisted since 2009, is strong enough to dominate for a few more years. Risk premiums are high and the price-earnings ratios of regional equity indices are moderate. In the worldwide performance derby, US equity markets in particular have left all other markets in the dust. Can they catch up? Fundamentally, there is a strong case for this. The divergence between growing profits and slightly lower valuations creates room to move up.


Equity regions compared

Past performance and financial market scenarios are not reliable indicators of future results.
Source: Credit Suisse

How bear traps trick the global equity markets

During the transitions from bull to bear markets, we are regularly bothered by bear traps. This refers to sell signals that subsequently do not come to fruition; investors count on falling prices, but fall into the trap because the market, contrary to expectations, does not fall. Such bear traps appear in every bull market. The current bull market has persisted for nine years and has set over 60 bear traps.

Where do we stand today? The recent fall storms were exacerbated by renewed concerns that inflation and capital market yields could soon start rising again. Investors fear that this will destabilize earnings expectations and financial market valuations. Indeed, an increase in the capital market returns between the end of January and the beginning of February this year triggered a 10 percent correction on most equity markets. However, the equity markets recovered. As recently as September, a similar rise in global capital market yields even led to an increase in global equity markets.


bear traps have been set by the current bull market during the last nine years.

Forecast for the Swiss equity markets

Interest rate turnarounds can also be interpreted in different ways. This is why a holistic view is so important. Interest rate turnarounds appear "bullish" when they point to economic acceleration. And they appear "bearish" when they signal overheating.

The key for the transition from a bull market to a bear market is usually a recession or a structural increase in inflation. Both currently seem extremely unlikely in industrialized countries as well as in China. The leading indicators also attest to the continuing good health of the Swiss economy.


Swiss PMI signals further growth

Annual GDP growth rates and trend growth of the Purchasing Managers Index (PMI)
Source: State Secretariat for Economic Affairs (SECO), procure.ch, Credit Suisse

A look at five reasons for an interest rate turnaround

  1. The discrepancy between the nominal economic growth and the interest rate level is too large. At equilibrium, interest and growth should tend to be similar. Markets, however, are rarely at equilibrium.
  2. Investors are very worried about potential wage inflation. However, a systematic inflation indexation of wages is a long way off. At the same time, digitalization gives employers an effective negotiating advantage over employees.
  3. The reduction of central bank balance sheets in combination with rising interest rates is often presented as the potential trigger of the next recession. To date, however, none of that can be seen in corporate profits or capital costs.
  4. A seemingly uncontrolled expansion of national debt points to an interest rate turnaround. However, unbalanced budgets are extremely long-term phenomena.
  5. There are fears that China or Japan could dump a portion of their significant holdings of US government bonds on the market. However, recent data from the US Federal Reserve has shown that the foreign positions in US government bonds have remained almost unchanged over the past twelve months.

In short, we expect bear traps, but not a bear market. It is advisable to prepare for both the stormy and the golden days of fall.