Is the bull market over? Is now the time to invest in Europe and emerging markets?

Chart of the week

Last week on Friday, the new figures on the labor market, the Nonfarm Payrolls, were published. The Nonfarm Payrolls measure the change in the number of people employed in the previous month, excluding the agricultural sector. Job creation is the most important indicator of consumer spending, which accounts for the majority of economic activity.

The chart shows the average monthly figures for 10 years (blue line), last year's figures (green line) and the 2024 figures (orange line).

An unchanged figure compared to last month had been expected. The published figure was slightly lower. This means that fewer new jobs were created than expected. As a result, the unemployment rate rose from 3.8 to 3.9%
Why this is important
This small change has helped many market participants to breathe a sigh of relief. Higher unemployment increases the chance of a rate cut in the near future. The chart above helps to better assess the situation. The value of newly created jobs is still significantly above the average of the last 10 years. To interpret the small deviation from the previous year as a trend reversal is exaggerated. The figure would have to fall below the average of the last 10 years to signal a trend reversal.

The chart shows the historical development of the US unemployment rate since 1969. The newly published figures mean that the average for the last 24 months has been exceeded for the first time. Since 1969, this has always been a sign of a major trend reversal towards higher unemployment.

If there are any negative surprises in the coming weeks, it will most likely come from this side. It is therefore advisable to follow all developments on the labor market very closely over the next few weeks.

Is the bull market over?
Are we currently only seeing a small correction on the stock markets or a major trend reversal that could push prices down until the end of the year?

The signs here are still not clear. This is also the reason for the current high volatility and uncertainty.

The fact is, if there is a major trend reversal, we would have seen the shortest bull market since 1946. The chart above shows the length of time in days that the market has risen after an interest rate reversal without a 10% correction.

Many therefore believe that the trend will continue, perhaps too many.

Large institutional investors usually have a main portfolio that they keep stable for years. If they are very optimistic about the stock markets, they also buy futures (forward transactions) and take additional positions. This is exactly what the chart above shows. It shows how many institutional investors additionally hold futures in their portfolios. We see a peak value for the last 12 years. If all major investors are already positioned far above the normal level, there will be no additional purchases even if the news is good.

The chart shows the extent to which the individual sectors benefited from the inflow of funds last year. It was actually only the technology sector into which additional funds flowed. If there is a correction now, it is therefore obvious that this sector will be hit the hardest.

But after the rather pessimistic observations, here is another argument for the optimists. The chart shows how long it has taken in the past 50 years for the US Federal Reserve to make its first interest rate cut after the last rate hike.

It has been 10 months since the last rate hike. The first rate cut is currently expected in September 2024. We would therefore arrive at a value of 14 months in this cycle. The expected interest rate cut is therefore quite realistic.

Is now the time to invest in Europe and emerging markets?
For investors, there are two investment philosophies that are diametrically opposed:
- “The trend is your friend”
For the most part, trends last longer than you think. It therefore makes sense to invest with the trends and not against them.
- “Mean reversion” or “contrarian investing”
Back to the mean. If prices move away sharply from the long-term average, they tend to revert to the long-term average.

Trend-following strategies are usually superior in a long-term comparison. However, if you invest too late in a trend, high losses are still possible.

You can make a lot of money with contrarian strategies, but you often need patience as you often bet on a trend change too early.

The chart shows that the return on the US and European stock markets was almost identical from 1989 to 2009, i.e. 20 years. From 2009 to today, however, the US equity market has outperformed Europe by a long way. So is now the time to bet on Europe?
The current trend can easily last another 2-5 years. For such long-term trends to turn, a trigger is needed. There is currently no such trigger in sight.
Almost all future solutions that have to do with artificial intelligence come from the USA. And Europe has a war on its doorstep.
One possible trigger would be a debt crisis in the US and a collapse of the US dollar against the euro. However, there is currently no sign of this.

The chart shows the difference in returns between US equities and emerging market equities. We are currently seeing the biggest underperformance of emerging market equities since 1964.
So is now the time to bet on Europe?
Globalization has meant that the US and Europe have outsourced almost all of their production to Asia and the emerging markets. However, the COVID crisis has made many companies aware of the dangers of excessively global supply chains. If the production of individual components fails in just one country, the entire supply chain collapses.

The political tensions between the USA and China are also having a negative impact and leading to uncertainty. Sanctions can cause entire supply chains to collapse.

In addition, there are interruptions to important supply routes such as the Strait of Hormuz or the Souez Canal due to conflicts in the Middle East.g

These developments have led to US and European companies building new factories closer to the main markets again. This development is also known as onshoring or de-globalization.

In view of these new trends, we do not believe that there will be a turnaround in investments in the emerging markets.

Here, too, a change in trend would require a trigger. This could include a change of government in China, which would lead to an easing or long-term solution to the conflicts in the South China Sea. Or that China fully complies with WTO rules and does not provide massive state support to strategically important sectors.