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Market Comment April 2021 - Greed to Fear - What to make of the recent market sentiment swings?

How does market sentiment swing from joy to fright?

Of government spending and central bank interventions! March 23rd marked the first anniversary of the current bull market. Exactly one year ago, the S&P 500 dropped to its lowest level in the short but tough Corona bear market. Although it only lasted a good four weeks, it pushed the market down by 34%. It fell just as much as in the famous crash year of 1987. Back then, it took 20 months for the market to recoup its losses. This time the pre-crash level was reached again after only five months. What is different this time? A unique concerted action by governments and central banks. Last year’s economic stimulus to combat the virus was huge. In the US alone the fiscal stimulus reached 16% of GDP or some USD 3 trillion, a measure unseen in peacetime. Add to this the Fed’s purchasing of USD 1.8tn US treasuries from March to July 2020 and you have the economy awash with liquidity. As expected, U.S. GDP growth is already humming along, and the Fed increased its growth estimate for 2021 to 6.5%. And yet the Biden administration seems determined to pump still more money into the economy, now to improve infrastructure. To some extent, the answer to why the U.S. government - and many others elsewhere in the world- is doing this is reasonably clear. Populist movements demonstrate that support for such policies is growing. Inequality is deeper than ever. Appalling statistics on deaths of despair showed that something was wrong long before the pandemic. At this point, perhaps it is best to believe the Fed, and the politicians currently running the U.S., that they really do mean what they say. They are making the judgment that unemployment must be tamed, and inequality must come down, whatever that means for inflation. If we are clear that governments have decided to change the paradigm, spend in a way they have not done before, and create inflation of a kind that has not been seen in a generation, what does it mean for the financial markets? Normally, such spending would herald the end of low bond yield. Indeed, bond yields have been rising recently and the belief that inflation is set to take hold again has spread through the markets. But central banks will not allow yields to rise to a point where they jeopardize the attempt to buy full employment, or to the point where they trigger a major selloff. The Fed is explicitly committed to achieving maximum employment, and it has pledged to hold off any rate increases until realized inflation is on track to average 2%. With central banks so determined to keep the bond market under control, risks of suffering a big loss continue to be low, and people keep buying. This is not just a point about the stock market. The value of US housing stock rose by USD 2.5tn in the pandemic year of 2020 to reach USD 36tn, driven largely by falling mortgage rates. An increase in interest rates could cause housing prices to tumble, creating a massive wealth effect that would stifle consumer spending. Markets, so far, are concerned about rising yields and switch out of stay-at-home stocks, However, rising infection rates will force more of us back into the stay-at-home economy; and if this concerted government and central bank intervention fails, we may be left with a very heavy and deeply indebted government presiding over continued slow and inequitable growth. Neither sounds very appealing and in the face of negative market sentiment, what do we recommend for our investors to do? It is time to hold tight and let the scenarios play out. Investors who stay in the markets prevail and the animal spirit will return. We are on the rollercoaster with you and if you like to have a chat, please feel free to reach out to us.

Switzerland April 1st, 2021


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