By Silvano Grimaldi, CEO of the independent asset management firm Grimaldi & Partners AG.
Zurich — Will the interest-rate increases of recent years lead to a severe recession, or can investors expect a soft landing for the economy? How should investors respond to these uncertainties? Silvano Grimaldi, CEO of the independent asset management firm Grimaldi & Partners AG, answers these questions.
Recession or Soft Landing?
The publication of the latest US nonfarm payrolls report for August, which measures the number of new jobs created outside the agricultural sector, showed an increase compared with the previous month.
However, the increase remained below market expectations and triggered a sell-off across international equity markets.
This reaction is likely to have been excessive, as the broader US economic picture remains positive:
- The US unemployment rate fell to 4.2% in August, while the labour market remained generally resilient.
- Labour productivity continued to increase during the year.
- Inflation continued to decline, while most economic indicators remained positive.
For a severe recession to occur, unemployment would need to rise significantly and persistently. This is currently not the case in the United States.
The continued increase in labour productivity is particularly important. Even if employment growth slows moderately, higher productivity can more than compensate for this effect.
This is supported by the continued upward trend in US gross domestic product during 2024.
Despite the somewhat disappointing nonfarm payroll data, the United States is therefore still expected to experience a soft economic landing.
How Should Investors Respond to Current Volatility?
The expected easing of US monetary policy, accompanied by upcoming interest-rate cuts, acts like a put option by providing a degree of protection for equity prices.
Lower interest rates and the normalisation of monetary conditions should stimulate the economy and increase the relative attractiveness of equity investments.
Despite the currently mixed market sentiment, the traditionally negative seasonality of September and the cooling of enthusiasm surrounding artificial intelligence, investor confidence could soon return.
This is likely to occur once economic data confirms that the feared severe recession will not materialise.
Regarding the US presidential election, the current uncertainty surrounding the outcome is contributing to equity-market volatility.
However, this volatility could gradually decline as the election date approaches.
Once the winner is confirmed after 5 November, regardless of which candidate is elected, the conditions could be in place for a year-end equity-market rally.
Investors should therefore remain calm and either wait or use market declines to build equity positions through a “buy the dips” strategy, particularly if they are not yet invested.
Conclusion: A Soft Landing Supports Gradual Equity Purchases
The equity-market sell-off during the first week of September, which resulted in the largest weekly decline for the Dow Jones Industrial Average since 2022, appears unjustified if the US economy is heading towards a soft landing.
The sell-off has made certain shares of leading technology companies available at more attractive valuations.
Cyclical industrial companies could also benefit from declining interest rates.
Following the summer pause, a resumption of the upward trend in equity markets therefore appears likely.
Investors seeking to benefit from this scenario should gradually increase positions in technology and industrial companies that have experienced significant price declines, following the established investment principle:
“Buy when there is blood in the streets.”
Disclaimer
This article does not constitute an invitation to buy or sell any of the securities mentioned.
All investment decisions remain the responsibility of the investor. Before investing in individual shares or other financial products, we recommend seeking comprehensive advice from a qualified professional.
