Is Trump switching the stock exchange light to red or is there light at the end of the tunnel?
The volatility at the stock exchanges is rising. Even casual bystanders have probably realized by now that the stock exchange light is yellow.
But what are the reasons for the greatly increasing insecurity of the investors? With the world economy in a synchronous growth phase, it is difficult to see why it has come to price declines at this time.
Four aspects will catch your eye when you track the market every day. And Donald Trump’s trade policy, which is currently all over the headlines, does not make it to the top of that list from our point of view.
I. Early indicators
The stock exchange is an anticipation mechanism. When the economic data report a recession, then there is an associated price decline at least six to twelve months prior. This week, too, early indicators have been published that suggest the nice and synchronous worldwide upward trend may not last for as long as we thought after all.
After the elections in Europe, the problems, too, seemed to be over for now. However, Mario Draghi drew attention to himself by demanding in a rather rude manner—by his standards—that European banks pay off their last remaining debts from the crisis in 2008. The steps for forming a government in Italy, which are proceeding faster than anticipated, could bring the uncertainties for Europe that the markets feared repeatedly in the past years.
III. U.S. tech sector
Technology is the most important sector for the stock exchange in the U.S., which has been rocked by a number of bad news for days now. Buzzwords such as Cambridge Analytica and Facebook, Uber’s accident in Arizona and another one with a Tesla car hold the potential to test the favorite topics “social media,” “autonomous driving,” and “electric car” in unprecedented ways.
For the first time in a while, the pressure on the so called “FANG” stocks (Facebook, Amazon, Netflix, Google) is rising with developments that could escalate into fundamental problems for the business models. Facebook has an impact on all social media and organizations that make their living from selling data. Shock waves for suppliers for autonomous driving and electric mobility are visible as a result. The high percentage share of FANG stocks in many indexes and other passive products holds the risk of a backlash in this area having a much bigger negative impact than most investors expect.
IV. Technical market data
You don’t have to be a supporter of the technical stock analysis. Accepting that many investment products and strategies, as a matter of fact, use technical analysis methods, even if they call themselves “smart” or “low volatility,” is enough. As a result, in today’s markets technical brands have an unprecedented significance.
The technical market data are currently not looking good. Take a look at the chart of Deutsche Bank. It has been a hot topic on the stock exchange TV channels in the U.S. for days now, and that is an important sign for the sentiments among investors—”behavioral finance” is the keyword. An intransparent derivative portfolio, rising refinancing costs, and oversized investment banking are just a few aspects. We have illuminated this topic before in our article on stocks “Deutsche—living the ‘Glencore moment’” from October 16, 2016.
Technical market data include the information that the currently biggest hedge fund worldwide, Ray Dalio’s Bridgewater, increased its short positions in DAX stocks at the end of last week. Of course, it would be interesting to know which positions Bridgewater is holding on the long side. But there is no such short reporting requirement as for short positions. For this reason, the long side of the Bridgewater portfolio hasn’t been published yet.
And last but not least: According to a report by CNBC, the confidence among investors continues to be at a 17-year high despite the rising volatility—only in the year 2000 were investors more euphoric. Unfortunately, that doesn’t make us more hopeful about the phase that is ahead of us.
Simply buying stocks and hoping that the decline is a safe opportunity to buy because it has always worked that way—dangerous. We’ve already explained in our last article on stocks what to do when the stock exchange light turns yellow. Mellinckrodt has positioned its portfolio much more defensively in the past week. The cash quota is at almost 25%. The net stock quota, i.e., stocks that are not hedged by futures, is under 10%.
We hope that the current phase of uncertainty will be over as early as April. But because hope is a bad advisor, we have prepared for further plunging indexes. Capital conservation clearly has priority in the current capital market situation. Our risk system hasn’t turned red yet but unfortunately is currently moving in that direction.