Bear market in the US poses a challenge for investors

The US market situation remains tense

The market situation remains challenging: The global "reset" of business, interest rates, and markets is still ongoing. While supply chains, job markets, and energy markets remain stressed, inflation is digging into the pockets of business and society. Stock market volatility is particularly high in times like these – and while recovery and correction often take place in close succession, there are many facts at present to suggest that erring on the side of caution is advisable:

For example, monetary policy in the US and Europe remains focused on slowing the economy in order to defeat the hydra of inflation. This serves to dampen hopes for further increases in profit margins, which remain high nonetheless. In addition, rising interest rates pose a two-pronged challenge for equity investments. First, they serve to increase the cost of capital for companies, real estate, and governments. The large number of major refinancings slated for 2024 could be casting a shadow. At the same time, the doubling of US mortgage interest rates to a level now exceeding 7% is putting a strain not only on the US real estate market but on consumer sentiment as well.

Second, this year's rise in interest rates marks the end of TINA ("there is no alternative") – a period in which primarily only equities have paid off in comparison with other investments. In the US, government bonds are once again paying yields of over 4.2%. Even in Switzerland, the S&P Switzerland Investment Grade Corporate Bond Index is posting a gross yield to maturity of roughly 2.1%. With its short duration of 3.8 years, this seems to be a real investment alternative once again – for the first time in years.

It is entirely possible that the US economy, like Switzerland's, will make it through in relatively good shape. This possibility is supported by healthy balance sheets, a high employment rate, and "the revenge of the old economy," i.e. the omnipresent need for investment in infrastructure triggered by war, climate change, and deglobalization. What's more, the pace at which interest rates are rising could potentially be slowed as early as the next interest rate hike expected in December.

So what does this mean for investors?

Since the beginning of the pandemic, US government revenues have risen by a total of USD 1,300 billion to a record level of USD 4,900 billion. However, this coincides with spending at a record high of USD 6,300 billion. The current interest rates on debt correspond to a cost of capital of roughly 2% and are likely to rise further.

In light of its essentially stable government structures, Credit Suisse expects the US to see development comparable to that in Japan, where the last 40 years of zero interest rate policy illustrate the paradoxical finding that in wealthy countries governed by the rule of law, rising government debt actually leads to lower rather than higher interest rates over the long term. Why does this occur? Because the higher the national debt, the greater the pressure on monetary policy, since monetary policy is always a balancing act between different monetary and sociopolitical objectives – and in the final analysis, social policy takes precedence over monetary policy. By contrast, hyperinflation is typically the result of political and social breakdown, as was the case in the Weimar Republic – or more recently, in countries like Venezuela, Zimbabwe, and Argentina.

In the meantime, investors can rely on the fact that competitive economies – like those of the US and Switzerland – are typically more flexible and resilient than the pessimists claim. In addition, investment strategy principles must always be kept in mind:

1. The choice of strategy influences more than 80% of performance. Market timing and stock selection are secondary factors in this regard.
2. A diversified portfolio spanning multiple asset classes provides the best protection over the long term and the greatest potential returns.
3. The longer the investment time horizon is, the more reliable the attainment of return forecasts becomes.
4. Leave emotions out of decisions, since they represent the greatest enemy of investment success. The belief that one is behaving rationally when investing is a common investment myth and is often accompanied by an emotional roller-coaster.

Lastly, it can be said that Credit Suisse has more optimistic expectations for capital markets in the years ahead: Inflation and interest rates will most likely stabilize, as will the economy, and the brutal trading year of 2022 will most likely be followed by a better 2023.