As stated in our last publication, we have entered into a year where in about 64 countries around the world, people representing about 49% of the world population head to the polls (Elections Around the World in 2024 | TIME). Some of them have already taken place. The one that raised the most interest to date was the election in Taiwan. Altough, the outcome was not to China’s satisfaction; Chinahas - so far - held back from stonger military aggressions against Taiwan. In Switzerland, we are heading towards the polls in March when we, the people, will have the opportunity to vote on two different popular petitions about our Old-Age and Survivors’ Insurance (Popular vote on 3 March 2024). Furthermore, after being forced to introduce the global minimum tax rate, Switzerland is one of the few countries actually implementing this minimum. At the same time, the US, as one of the main drivers of the global minimum tax rate, is postponing the implementation until 2026.

Jackpot S&P 5,000

After a broad year-end rally in 2023, investors were nervous about whether this rally could continue. After a setback in January, especially the magnificent seven… wait… the magnificent six carried on with their rally. Due to a weakening demand, Tesla performed poorly and fell out of the club. Who's next? Maybe Apple.

Nevertheless, indices continued their rally because of the massive weight of the big tech in the S&P 500 and the Nasdaq 100. After Meta's fourth-quarter report, investors were so excited that they pushed the share price up, adding USD 196 billion, the largest in history, to the market cap within one trading day. A week later, the S&P 500 reached a new all-time high of 5,028.35, making it the S&P 5,000.

However, the US markets were not the only ones with a good start in 2024. Japan's Nikkei 225, after performing about 30% in 2023, is up more than 10% year-to-date. Altough this optimism calls for some skepticism. Not even the central banks' stressing that interest rates will not be moved down shortly could stop this. After a very brief reaction of disappointment, investors focused on the strong numbers supporting the appearance of a strong economy. Disinflation and strong employment figures are worth more than any worrisome signals that could stop the party.

Nevertheless, some risks have the potential to turn off the light, at least partially. China is still caught in a deflationary environment and on top of that they are struggling to stop the outflow of investor's money. Furthermore, their real estate sector is weak, and they are not the only economy showing cracks. Commercial real estate in the US and Europe is struggling. According to several news portals, about USD 544.3 billion in 2024 and another USD 533.2 billion in 2025 are expected to come due. About USD 2.8 trillion of commercial real estate mortgages will mature and must be either paid back or refinanced between 2024 and 2028. Considering the high interest rates and the investor's hope for falling financing costs, chances are that these mortgages will be refinanced within a much shorter maturity. Additionally, chances are that some of the debt will not be paid back, leading to the sale of the building. Once more buildings are on the market than there is demand, things will get tricky. You see where this goes. Welcome back to 2007. While banks improved their capital during the last decade, they can still go bankrupt, as we saw last year.

Why am I telling you this? As mentioned, the sentiment in the markets is optimistic. This is also shown by CNN's fear and greed index (several providers are calculating such an index, and the outcome is similar everywhere).

Therefore, the outstanding performance of indices is not something that should be taken for granted. Once the market turns, it will matter what investments you choose and which you do not. Jeremy Grantham, founder of GMO, warned repeatedly that the US market is highly overvalued and that investors would be well advised to stay away from it. Another star investor, David Einhorn from Greenlight Capital, stated that passive investors broke the markets. This explains the ongoing performance of indices such as the S&P 500, where valuation is not a criterion for an investment anymore.

However, every party has ended so far, and we firmly believe that the US party sponsored by Uncle Sam will eventually find a halt, too. In such a scenario, you want to know your hard-earned money being diversified and protected against the loss of equity and currency value. Some might think that diversification can be reached through an investment into the MSCI world, another passive investment vehicle. However, the name is misleading. US equities represent about 70% of MSCI world equities, the largest country weight on record.

The inflation balloon rises further

The yields of fixed-income investments are highly dependent on the monetary policy, which is dependent on inflation since price stability is one of the main tasks of central banks.

While in Switzerland, inflation fell below 2% in June 2023 already, it reached 1.3% in January 2024. At the same time, inflation in the US has fallen, too, but less than investors hoped for. After showing 3.4% in December, inflation fell further to 3.1% in January. However, expectations were 2.9%. While year-over-year inflation came further down, month-over-month inflation rose. This leads to the question of whether the Fed will lower interest rates in the first half of 2024 at all. In January, expectations were that the Fed would decrease interest rates in March. After the latest interest rate decision and Mr. Powell’s reinforcement that this is not likely, expected interest rate decreases were postponed to May. Now, it seems that even May could be too early.

Furthermore, the expectations were that the Fed would decrease interest rates five times this year, in total, by 1.25% to a level of 4%. We keep our forecast and think this is still too optimistic unless a major event is happening, pushing the economy into a recession. Otherwise, as long as inflation is not closer to its two percent target, it is unlikely that the Fed will make a move.

Nevertheless, the probability that the Fed or other central banks will increase interest rates further has become unlikely. Accordingly, the time is ripe to look out for suitable fixed-income investments. But do not make the mistake of becoming greedy with bonds. There might be some high-yielding bonds that look juicy. However, only compromise on the quality of investments if you have done your due diligence and know the risks.

Mirror mirror on the wall, who’s the fairest of them all?

We have experienced an environment of outstanding forex volatility in the last four years. Interestingly, the USD Index (DXY) has strengthened during that period. Does that mean that the USD is the fairest currency of them all? By no means! However, economically speaking, the movement of the USD can be explained.

From an economic standpoint, the expansionary fiscal policy coupled with a contractionary monetary policy speaks for a stronger currency in the short term (Robert Mundell and Marcus Fleming deduced this conclusion). However, an expansionary fiscal policy gets along with increasing debt. The increase in government debt levels during the last four years has been ludicrous. Therefore, in the long term, investors will question the sustainability of the debt. The Congressional Budget Office in the US recently announced their projections, expecting a deficit of 6.4% of GDP and a debt-to-GDP ratio of 114% by 2033. From our perspective, that is too optimistic. However, once the credibility of a government starts to crack, investors begin to withdraw their money, leading to a lower demand for their currency and a weakening economy due to a lack of foreign investments.

Accordingly, for the long-term success of a currency investment, the credibility of a country’s fiscal and monetary policy is essential. Especially in Switzerland, we see this credibility being in good order. Switzerland has a debt-to-GDP ratio of about 40%. Compared to other developed countries, especially the G7 Average (128%), that is impressive.

Accordingly, keeping in mind all the promises of additional fiscal spending, the risk remains that the GDP growth will not match the one of the last two decades, which would worsen the global indebtedness. It's a risky gamble. Therefore, we will focus on some chosen currencies that will have the economic support to be a haven for now and the future. The Swiss Franc, for sure, is one of them.

Gold rambles below $2,000/oz

Since late November 2023, gold has held above USD 2,000 per ounce until this Tuesday. The strength of gold was supported by the vast weakening of the USD within the year's end. This can no longer be claimed for 2024. As stated above, the USD index (DXY) gained about 3%. Coupled with the risk-on sentiment, the expectations would have been for gold to move lower. Yet, the hope for a pivot from the Fed and geopolitical insecurity kept gold high. With the release of the US inflation numbers this Tuesday, our view that the Fed is not moving interest rates lower soon obtained support. Accordingly, the price of gold fell, moving below USD 2,000 per ounce. Also, silver and platinum, our other two favored precious metals, suffered due to the latest inflation news. As stated in previous publications, we would not be surprised to see further pressure in the short-term. We see a resistance level at USD 1,800. With silver, the current price of about USD 22 per ounce is already rather low. Therefore, we do not expect the price of silver to fall much further. The same applies to platinum, which trades around USD 870 per ounce. 

An environment of decreasing interest rates would catalyze precious metals to break out into higher spheres.

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