“Timing markets – is it not what we as bankers ultimately get paid for?” This question came up during our year-end market outlook update. Given the way that the question was asked, you can already tell that we had made the point of not trying to time markets into year end.

Our reasons are of a general nature but are also related to the current situation, which is as much in flux as you can imagine given the gyrations in markets and what is taking place on the ground in many places of the world. Take, for instance, the war in Ukraine: after the recent shift in military balance on the ground, anything from a full broad-based escalation to a truce is possible.

Both outcomes would imply low-probability, high-impact events that could trigger completely opposite price reactions in energy prices and stock markets. So trying to time such geopolitical events in financial markets pretty much boils down to claiming that “I can see into the future” – something your counterparty would be even more sceptical about than your claiming to see where asset prices are heading.

Contrarian approach to investing

As opposed to claiming to be a clairvoyant, one could alternatively go against the way investors are currently positioned, which falls under the buzzword ‘contrarian investing’. Contrarians do not claim to know better but look at extremes in positions. This tends to work, but it is important to understand that, as research suggests, contrarians do best either in the very short term or the very long term.

The medium-term belongs to trend followers and those going with the flow. In other words, you either take positions against the market for a few days or weeks or you bet on long-term fundamentals. It is quite striking that most investor legends do the latter.

Ray Dalio, Warren Buffett, and Jeremy Grantham are known for a disciplined long-term plan rather than timing markets. We are not on a mission here and are happy to provide short-term views. Yet anything but tweaking positions given short-term price fluctuations seems daring. History tells us that it pays off to stay invested, as shown by our Number of the Week.

Number of the week

What’s happening with inflation?

US inflation figures for August will determine how high the pressure is on the Fed to keep raising interest rates. There is a good chance that US inflation slowed further in August. Gasoline prices, for example, declined in August once more, and food price inflation is also expected to have slowed. Durable-goods price inflation, which had been particularly strong during the post-pandemic boom, is also slowing, as numerous supply bottlenecks are easing and inventory levels are rising.

US rent-price inflation is expected to be the last component that will peak. Rents account for around one-third of the basket of goods and services used to measure inflation. At the same time, house prices are the main factor that drives future rent inflation. With house prices declining, there is a good chance that rent inflation, measured as the annual increase in prices, will peak in the coming months. The monthly increase of rent inflation has already declined somewhat.

The overall inflation dynamics should bring the headline inflation number down to 8% (from 8.5% in July). As energy and food inflation is a major driving force behind this decline, the core inflation rate (which excludes these volatile components) is expected to increase to 6.1% (from 5.9% in July). A softer inflation reading lowers the pressure on the Fed to continue its exceptionally aggressive rate-hiking path. After two rate hikes by 75 basis points, the Fed would have the opportunity to slow its pace if inflation pressures appear to be easing.

At the same time, the labour market and economy overall still appear to be very resilient, suggesting that the economy can digest a much tighter monetary policy. Financial markets expect another rate hike by 75 basis points at the next Federal Open Market Committee meeting on 21 September, while we still see a decent chance that the Fed will slow the rate-hiking pace to 50 basis points. A lower inflation print this week would support our view.