GRIMALDI & PARTNERS: Concerns about a recession are unsettling investors. Is the bull market on the stock markets over?

By Silvano Grimaldi, CEO of the independent asset management GRIMALDI & PARTNERS AG

Zurich – Will the interest rate increases of recent years lead to a severe recession? Or is a soft landing to be expected? How should investors deal with these uncertainties? Silvano Grimaldi, CEO of the independent asset management firm Grimaldi & Partners AG, gives you answers to these questions.

Recessions or soft landing?
The publication of the nonfarm payrolls in the USA for the past month of August, which measures the number of new jobs outside of agriculture, did show an increase compared to the previous month. However, this increase was below market expectations. This triggered a sell-off on the international stock exchanges. This reaction is likely to be an overreaction, as the general economic picture in the US is positive:

The US unemployment rate fell to 4.2% in August and the labor market is generally resilient.
Labor productivity has continued to rise this year.
Inflation is declining and economic data is mostly positive.

For a severe recession to occur, unemployment would have to continue to rise sharply, which is not currently the case in the US. It is crucial that labor productivity continues to grow, because even if job growth slows somewhat, this effect can be more than compensated for by increasing productivity. This is demonstrated by the fact that US GDP continues to show an upward trend in 2024. In the US, therefore, despite somewhat disappointing NFP labor market data, a soft landing of the economy is to be expected overall.

How to react to current volatility?
The expected easing of US monetary policy with the upcoming key interest rate cuts acts like a put option (price hedge) for stock prices. The associated lower interest rates or the normalization of interest rates will stimulate the economy and increase the relative attractiveness of equity investments. Therefore, despite the currently rather mixed stock market sentiment, the well-known negative seasonality in September and the calming of the euphoria surrounding the topic of AI, investor confidence can soon be expected to return as soon as the real economic data confirms that the feared severe recession is not occurring.

Regarding the US presidential election, the stock market volatility that exists due to the current uncertainty about the outcome should gradually reduce as the election date approaches. If a winner is determined after November 5, regardless of which of the two candidates wins, the way could be clear for a stock market rally at the end of the year.

Therefore, investors should remain calm and either wait or use price declines to build up stock positions (“buy the dips”) if they are not already invested.

Conclusion: A smooth landing means increasing your stocks in small doses
The stock sell-off in the first week of September, with the highest weekly losses for the Dow Jones Industrial Average (DJIA) since 2022, seems unjustified if a soft landing of the economy in the USA is to be expected. As a result, some stocks of leading companies in the tech sector are now cheaper thanks to the sell-off. Cyclical industrial stocks are also likely to be positively influenced by falling interest rates. A resumption of the upward trend on the stock exchanges can therefore be expected after the summer break. Investors who want to benefit from this should now gradually increase stocks in the tech and industrial sectors that have been heavily punished, according to the well-known investor principle of "buy when there's blood in the streets".