In this market update, we are looking back on the global financial markets for the month of July, highlight significant trends and share our outlook on the months ahead.
Economic situation in the USA
Inflation data for June were again positive, with an annual inflation rate of 3%, compared to 4.1% in the previous month. This trend was also mirrored in core inflation, albeit at an elevated level. Core inflation fell from 5.3% to 4.8% in June. This development indicates that the high interest rate level appears to be impacting inflation. However, it remains uncertain how long it will take to reach the 2% target.
The labor market presents a contrasting picture: it continues to be surprisingly robust, a trend the Fed is not keen on, as it prevents consumer demand from cooling down. This was confirmed by a further slight increase in consumer spending for the second quarter of 2023.
As expected, in response, the Fed raised interest rates by another 0.25 percentage points after the interest rate pause in June. Yet, it remains unclear whether there will be another interest rate increase at the September meeting, as the U.S. economy has been consistently robust and even reported growth in Q2 2023.
Thus, the future remains uncertain in the United States. Balancing the fight against inflation without stalling the economy now seems like an achievable goal.
Economic situation in Europe and Switzerland
In the Euro zone, the situation looks similar to that of the US, with falling inflation coupled with a stagnating core rate and a central bank that has continued to raise interest rates by 0.25 percentage points. Unlike the USA, however, the effects of the interest rate hikes are becoming more apparent in Europe. For example, the business climate is increasingly gloomy and industrial production continues to decline steadily. As inflation also remains at a higher level than in the USA, it is assumed that the European Central Bank will need to continue combating inflation with interest rate hikes for some time. Economic growth continues to decline year-on-year in the second quarter of 2023.
In Switzerland, inflation fell to 1.7 percent in June and is therefore no longer a problem domestically. The Swiss economy also experienced a decline in economic growth this year and last, but it never contracted and seems to have bottomed out in Q1 2023. Analysts even project that growth of 0.6% can be reported for 2023. This strength and stability of the Swiss economy is reflected in the unchanged strength of the Swiss Franc, leading to currency losses in USD and EUR.
Nasdaq rebalancing
In July, a rarely implemented measure was taken in the Nasdaq 100, an occurrence which has only happened twice before in this index. Due to the AI hype at the beginning of the year, some technology stocks, such as Apple, Microsoft, Alphabet, Amazon, and Nvidia, experienced significant increases in value. As a result, these stocks collectively accounted for over 48% of the market capitalization in the Nasdaq 100. The weight of these stocks was reduced on July 24, since the rules governing the construction of the Nasdaq 100 state that issuers with individual weighting exceeding 4.5% cannot surpass a combined 48% of the entire index. Prior to this measure, it was unclear what the exact impact on the financial markets would be, as passive-indexed products based on the Nasdaq 100 also needed to be reweighted. However, the resulting impact turned out to be relatively minor.
Our comment
While the U.S. has proven to be a robust economy in many respects, Europe seems to be struggling more with increased interest rates. Germany, the former powerhouse of the European economy, has recently experienced a significant downturn and recorded two quarters of negative economic growth. Therefore, the U.S. and Switzerland currently offer a more attractive environment for capital investments. However, it’s important to bear in mind that the valuation of the U.S. stock market is once again quite high. If investors now expect that the high interest rates will still negatively impact the U.S. economy over the course of the year, then a significant market correction can certainly be anticipated. It is therefore essential to continue monitoring developments and adjust the orientation of investment portfolios accordingly. Including more defensive sectors such as healthcare, energy, or utilities in the portfolio can help mitigate the potential negative impact of a market correction.
