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Market Comment - July

The idea that we might one day send any object into space, let alone put men into orbit, was long regarded as preposterous. The skepticism was well-founded, since the correct technologies were simply not available. To travel in space, a craft must reach escape velocity – for vehicles leaving Earth, it is 11.2 kilometers per second. To put this figure into perspective, the sound barrier is a mere 1,238 kilometers per hour, yet it was only broken in 1947. Certainly, there are countless achievements which humans thought would never be possible. In the present-day world, Fed Chair Jerome Powell is trying to achieve something, the US economy never has witnessed before: To move inflation from above 9.00% back to 2.00% without creating a recession. Mr. Powell assured investors, that he is closely monitoring economic data, and he promised to respond to any meaningful weakness. Since his speech, jobless claims have been rising, and the US unemployment rate has reached 4.30%, while consumer price inflation remains still above the US Central Bank’s 2.00% target. The obvious question arises: What is more important, the economy or inflation? Can the US afford a recession? Probably not. Can the US afford an inflation rate of 2.50 – 3.00%? Of course, it can. And with the current debt burden, a higher inflation rate would be appropriate. Since weaker economic data has hit the tape, markets are fully betting on a rate cut in September, despite inflation hovering above target. Bets for a 50 bps. rate cute are currently at 37.50%. We would strongly recommend a 25 bps. rate cut. A larger rate cut would send a false signal to the market. Statistics show, that after a 50 bps. rate cut, markets reacted only positive for a short while and resumed a downtrend afterwards. The message would be, that the Central Bank is in panic mode. The average 12 months return after a 50 bps. rate cut is - 15.70%, and for 24 months later the average stands at -28.45%, using data going back to 1990. Certainly, the US economy is currently not in a bad shape. But it would be a pity, to jeopardize it because of a stubborn inflation target. Remember, its late cycle. The surprising event, looking at sectors and industry groups, was the fact that the technology – and discretionary sector started to weaken substantially, while other sectors started to improve on a relative basis. Even small caps started to outperform the market. Until a sustainable trend reversal can be confirmed, more data is needed, but it’s an encouraging first sign of strength. Most investors believe, that without the leadership of technology, especially the US stock market will be unable to rally. But if the economy is holding up well, this assumption could turn out to be bogus. In other news, there are first signs, that the great “cohabitation” of the largest technology companies is coming to an end. Especially Alphabet and Apple, who used to be good partners, could see their service business model endangered. Looking at seasonality, while August is not such a bad month, September is the worst month of the year to buy stocks, while October the best month to add risk. Warren Buffet finally sold half of his Apple position, reducing holdings to 24.5% and Berkshire Hathaway is now sitting on a stunning cash pile of USD 276.9 billion or 25.00% of its assets. If the FED starts cutting rates slowly, but surely, it will be interesting to see where the Oracle of Omaha will put his money to work, while Mr. Powell refrains from the idea to get in the history book of first-time achievers. There is too much at stake.

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