As the month of August has come to an end, the gold and corporate bonds turned out to be the big winners, as the investors, who were hunting for higher returns, kept piling their money in those havens.
Taking the main headwinds that markets are facing currently into consideration, namely: conflict between the existing and the rising world economic powers (U.S. and China, respectively) as well as Brexit and the end of the long-term debt cycle into consideration, the majority of the investors remains cautious, and there is a good reason for that – equities are overvalued regardless of what their prices are compared to – sales, earnings or balance sheets of the companies, and the 10-year government bond yields in U.K and U.S. are at their all-time lows, but still not negative, as they are in Germany.
In addition to the negative yield carrying government debt worth $17tn globally, negative yield is becoming a norm for the institutional deposits – The Swiss National Bank and European Central Bank are currently offering the -0.75% and -0.4% deposit rates respectively.
Those who are trying to avoid putting their investments at risk of the escalating trade war and the slowing U.S. economy, are actively moving their money into high-rated corporate bonds as well as into gold – a common measure taken to mitigate the losses in the times of market stress.What investors should be thinking about during this era of surprises is not the political hysteria that is happening around the world – the likes of such political events have been witnessed in the past; however, nobody so far has ever offered negative interest rates on paper money.
In the light of the fact that markets are commonly dominated by the herd mentality, fear due to the uncertainty, being the driver of decision-making may potentially become the reason behind the next market crash.