Autumn rally or October crash?

• BNP Paribas
  

Autumn rally or October crash? That is the question here. While the environment appears to be becoming increasingly difficult, the stock markets are holding their positions. A good example of this is the Swiss stock market. Despite an escalating dispute between Switzerland and the USA over trade tariffs, there is not much sign of this on the domestic stock markets. The SMI is trending sideways at a very high level and is still showing significant growth compared to previous years. Even if other indices such as the German DAX are performing better, Swiss investors can be satisfied in view of a trade tariff of 39% on many domestic products imported into the USA.

But will the good performance continue? Isn’t there a threat of a major correction – an October crash – and thus an adjustment to the weakened economic outlook in Switzerland? Or do the poorer prospects not offer the potential for surprises and thus sufficient material for an autumn rally? After all, negotiations between Switzerland and the US are still ongoing, albeit not on camera, so a reduction in tariffs cannot be ruled out.

Statistics say October is good for everything

Well, to anticipate the answer right away, since no one can see into the future, the question of whether it will be an autumn rally or an October crash must ultimately remain unanswered. The only certainty is that it will continue, but how?

The statistics may provide an indication of this. If you look at the performance of the SMI on a monthly basis, you can see that October and December deliver the best performance of the year. Since 1988, the SMI has risen by an average of 1.2% in October and by the same amount in December. Investors should therefore look ahead with confidence and put the October crash behind them.

But wait, not quite so fast. Even if, statistically speaking, October is a good month on the stock market, there have already been some sharp price falls. In October 2008, for example, the SMI slid downwards in several spurts as a result of the financial and debt crisis in Europe, which had its origins in the real estate crisis in the USA. And in October 1997 and 1998, the SMI also fell sharply in response to the Asian crisis at the time. And it was also in October 1989 that the SMI came under pressure, triggered by concerns about a sudden end to the merger fever in the USA. Whichever way you look at it, October is not without its challenges as a stock market month and is always good for surprises, both positive and negative.

Interest rate and tariff cuts trigger an autumn rally

And what speaks for a rally? The greatest fantasy at the moment is probably fed by possible further interest rate cuts, both in the USA, the eurozone and Switzerland. But these are not always realistic. After all, the Swiss National Bank (SNB) has already cut the key interest rate considerably in recent months, currently to 0%. Although this does not mean that the bottom has been reached – it is a peculiarity of monetary policy that interest rates can also be below 0% and that people are still rewarded for borrowing money – those responsible have already signaled that such a step will not be taken lightly – in other words, negative interest rates are unlikely to happen any time soon. As a result, there is currently limited interest rate cut fantasy in Switzerland. The situation looks better in the eurozone and the USA. Depending on the inflation trend, interest rate cuts are still conceivable here and there, more so in Europe than in America. This could have a positive feedback effect on the Swiss stock market – whether this already harbors the potential for a rally in the SMI remains to be seen, but it cannot be ruled out.

But what other factors speak for “hot days” in October if interest rate cuts alone are not enough? A reduction in US trade tariffs on Swiss products would probably be a possible driver of domestic share prices and an entirely realistic scenario. After all, a US appeals court ruled in early September that Donald Trump had exceeded his authority by imposing tariffs on the basis of the International Emergency Economic Powers Act (IEEPA) of 1977 and that these tariffs were therefore illegal. The country-specific tariffs in particular are affected, which for Switzerland amount to the 39% already mentioned. Even though the decision will not become legally binding until October 14 and the US government has lodged an appeal, something could happen in October. Either the Supreme Court, which now has to rule on the appeal, will rule in favor of the government, or Trump will have to come up with something. Either way, October will be interesting.

As a result, investors remain loyal to the stock market. For domestic investors, Swiss equities are the core investment, supplemented by European securities. However, share purchases in the USA should be treated with caution and are fundamentally subject to the problem of a dollar devaluation. The USA is aiming for a significant weakening of the dollar to support exports, which means that US securities in Swiss portfolios will suffer currency losses. Both an overweighting of Swiss and European equities and the protection of US equities against currency losses can be accompanied by certificates. An index investment in the SMI could be sensible, as could Mini shorts on the USD/CHF currency pair, allowing investors to bet on a falling dollar against the franc and thus hedge their currency risk.

You will find in our Mini Future Certificates brochure on page 21 for an example of how the US dollar currency risk can be hedged with the help of USD/CHF mini short certificates.