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Relative to both risk and historical figures, that performance is a lot worse.

The drivers are obvious: higher interest rates and higher credit spreads. Roughly speaking, yields on 10-year government bonds have risen by some 150 basis points this year, whereas credit spreads on high-yield bonds have almost doubled.

That pretty much sums up the spectres haunting the stock market as well: central banks fighting inflation through tougher monetary policies (higher interest rates) despite possibly triggering recession (financial risk incl. credit risk). The worst performing stocks have been companies with lower current earnings and hence higher sensitivity to changes in interest rates. True to form, the Nasdaq composite index fell by 29 per cent in the first half of the year.

During the last two weeks of June, interest rates eased a bit, most likely reflecting a belief that central banks may soften their stance. That leaves recession as the main market menace. While there's no disputing that a recession is bad news for corporate earnings and consumer wallets, there are a couple of points that you should keep in mind.

First, perhaps surprisingly, earnings estimates are still holding up. If you believe the judgement of the analysts, the entire stock market fall is due to lower pricing. For the S&P 500, the next 12 months' P/E multiple has fallen from 22 to 16, according to FactSet, while price to cash flow is reduced from 16 to 12. In bottom-up estimates, then, there's no recession in the making, at least until next summer. It seems that the stock market is adjusting prices in accordance with higher interest rates, while holding on to a belief in sustained profitability.

Second, there actually exists an estimate of the cost of recession to the stock market. I can give you a precise figure. Compared to the situation on New Year's Eve, before we knew about the war in Ukraine and everything else that has happened, I'd say the cost to the S&P 500 is exactly 20 per cent. Yes, that's equal to this year's large decline. The point is that whatever you worry about now, someone else worries about, too. The world's largest and best backed opinion poll has delivered its verdict, and that verdict is 20 per cent.

Mind you, that's no estimate of future price movements on my part. It's just a reminder that fully known risks do tend to be discounted. The fear always precedes the facts.




Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager's skill, the fund's risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.

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