For a change, the markets had a more positive week with the stronger-than-expected economic data, dovish hinting of the central banks and the better-than-expected earnings season giving the equity markets hope. At the same time, European and US PMIs and Europe’s inflation figures were weaker than expected. What should investors do in the current market situation?
Last week offered both good and bad economic news. The preliminary GDP figures for the third quarter were better than expected in both Europe and the USA. The earnings season got properly underway and its results were generally better than expected, with the exception of the technology sector. In its meeting on Thursday, the ECB announced a 0.75 percentage point rate hike, but simultaneously hinted that the pace of the interest rate hikes might be curbed in the future. The ECB President Christine Lagarde stated that she was worried about slowing economic growth.
Driven by the positive news, the equity markets rose by approximately 2 per cent in both Europe and the USA. Interest rates and credit spreads fell, raising the value of fixed income investments.
Worse news came with regard to inflation and PMIs. On Friday, the inflation figures reported by many European countries were clearly higher than expected, highlighting the challenge facing the ECB.
Both Europe’s and the USA’s PMIs fell slightly from last month, but are still moderate. The indices consist of the results of surveys conducted among companies’ purchasing managers and describe companies’ production, order intake, employment level and other key indicators. The index provides a good picture of economic and inflationary development, as companies pass the prices they pay for orders onto their own prices, and therefore either raise or lower inflation. If a company has made a lot of new orders, it can indicate a recovery in economic growth.
Earnings season so far giving off positive signals, tech companies faltering
Overall, the current earnings season has been giving off positive signals on economic development. The earnings of companies have exceeded expectations by more than three per cent in both the USA and Europe. There is, however, considerable variation between different sectors: expectations have clearly been exceeded in the material and energy sectors, but tech companies have been faltering.
The earnings of the technology and communications company Meta and Google’s parent company Alphabet were a disappointment for investors. Meta’s turnover fell, a rare occurrence for major tech companies. Additionally, the company’s costs rose, which speaks of the current high cost of recruiting high-quality workforce.
Europe’s gas stores filled to the brim
The energy crisis predicted throughout the summer and autumn, resulting from insufficient gas volumes, seems to have abated for the time being. The gas stores of Europe’s major countries are almost full. A warmer than usual October has reduced heating costs more than expected, as a result of which there is a massive oversupply of natural gas. The price of gas has collapsed and was even negative for a time.
It is possible that the price of gas will continue to fall if upcoming weeks are mild and the oversupply continues. Regardless, the threat of an energy crisis has not been called off entirely. The situation is nevertheless more optimistic than a month ago and Europe may be able to avoid the worst-case scenario in which power cuts would be necessary in parts of the continent.
Sharp price drop in US housing market
The housing prices in major US cities experienced the greatest monthly drop since the financial crisis. However, a similar crisis is not expected this time, primarily thanks to structural factors: less housing has been built in the USA than before the 2008 crisis, which is fuelling demand. In addition, the financial sector is not involved in the housing market in the same way as it was 15 years ago.
For an economy struggling with high inflation, the decline in housing prices can even offer some relief: the housing market is a significant part of the US economy, and the deflation it has experienced should have a considerable impact on headline inflation, albeit with a delay.
What to do and what not to do in this situation?
In an unstable bear market, many investors are focused on the risk level of their portfolios and where their limit lies: when to sell and wait for a more favourable moment to get back in the game? Usually, long-term investors who practice temporal diversification should however bear in mind three pieces of advice for a bear market:
- Don’t sell
- Don’t try to buy at the bottom
The first two pieces of advice are based on the same reason: the investor will most likely be late when trying to sell at the top and when trying to buy at the bottom. Also, by exiting a market, the investor loses the return achieved when the market begins to rise. For investors who began investing in 2006, exiting the financial crisis stock price bottom even for two months meant a close to 80 per cent smaller return compared to an investor who did nothing to their portfolio during the crisis, when the portfolio was held until October of 2022.
- Don’t do what everyone else does
Selling when everyone else is selling and buying when everyone else is buying means that the investor ends up selling for less and buying for more. The best option for long-term investors is to diversify their investments temporally and to continue buying regularly even when the markets are on their way down.
Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.