By Bertel Roslev Rasmussen

The positive trends from June and July were replaced by renewed investor concerns about ongoing interest rate hikes by central banks in August. Inflation continues to decline, though not as rapidly as many expect, and coupled with rising energy prices again, investors have now begun to anticipate higher interest rates for a longer period. The consensus now is that the interest rate hike from the ECB on Thursday is the last or second to last in the series of rate increases by the central bank, while the FED is taking a pause to observe the effects of the significant interest rate hikes already implemented.

These higher interest rate expectations weighed on stocks in August, particularly impacting interest-sensitive growth stocks early in the month. Towards the end of the month, fresh economic data from the USA indicated a slowdown in growth, paradoxically causing stocks to rise again on the reasoning that slightly less growth leads to less inflation and less pressure on interest rates, which is typically beneficial for both stocks and bonds, provided the growth doesn't dip so low that we enter a recession, historically resulting in falling stock prices.

The macroeconomic environment can still be best described as muddy. If you ask economists in general, they will tell you that a recession in the US/Europe is just around the corner, supported by many traditional "recession signals." Stock markets, on the other hand, seem indifferent and continue to trade, especially the largest American growth stocks, at very high earnings multiples. Among the optimists, one of the reasons for these high stock price increases is attributed to the AI breakthrough, expected to lead to productivity gains and simultaneously dampen inflation.

It is understandable that investors are perplexed because it seems like the world is currently running in two gears. Here in Europe, manufacturing-heavy economies like Germany and the UK are operating at a very low gear, and a recession is probably already a reality. In the US, things are okay right now due to loose fiscal policies, a boom in artificial intelligence, and infrastructure and industrial construction, while interest-sensitive parts of the economy weaken. In Japan and India, the recovery continues, while China has a two-speed economy – a downturn in construction/housing/infrastructure/parts of the industry and growth in tourism, restaurants, green industries (electric cars, solar, wind), and consumption.

There is indeed a lot to keep an eye on for economists and market observers, and it's worth remembering that the transmission from the real economy to the stock market is very weak. This is why we generally advise our investors not to project their experiences from the local economy (the Danish one) or newspaper headlines about the European or American economy onto predictions about the stock market. It's better to acknowledge that the dynamics of the stock market are a very complex matter and instead have a broad approach to your stock investments, with exposure to all kinds of weather.

That being said, in our advisory of stock portfolios, we have a preference for lower-risk and inexpensive stocks with a smaller market size. Our recommended managers generally avoid tech giants, which are priced for perfection and are therefore at risk of significant headwinds in the coming years.