Nothing describes the current market situation better than a quote from Warren Buffet from 1986:
“What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
The turmoil in equity markets at the beginning of August made clear how nervous capital market players are and how fearful they react to unexpected developments. Our analysis of the mini-crash in Japan with subsequent significant corrections in other markets leads us to the conviction that in the long term it is right to avoid cluster risks in portfolios and thus to resist the temptation to follow the greed of investors in individual sectors or even in individual titles.
The economic data in USA is increasingly showing the depressing effect of interest rate increases and the European economy is also showing clear signs of slowing down. At the same time, however, household incomes are accommodative, what should lead to a recovery of the respective domestic economic activity if a change in interest rates occurs – the ECB already started to deliver. The global economy will have to do without China as an economic driving force for some time, as all the support measures introduced there so far haven´t shown desired results, with corresponding dampening effects on other countries in the Far East, but also on the western economies.
The yield curves in USA and Europe reflect interest rate expectations and show a high probability that the drag-effect of high short-term interest rates on the respective economies will expire over the next two quarters. The interest rate markets have already developed positively this year and the longer-term interest rates have been based on the economic conditions.