Artificial intelligence trend continues. Fear of inflation. Where is the energy crisis?

Chart of the week

The chart shows the return since December 2022 that an investor would have had if they had invested in the seven stocks Meta, Amazon, Apple, Microsoft, Google, Tesla and NVIDIA (dark blue line). Gray is the overall market and light blue is the overall market excluding the seven stocks mentioned first.
Why this is important
In 2023, you only had a good return if you had the seven magical stocks mentioned above in your portfolio: The Magnificant 7.

The question is how long this will continue. That is why the publication of NVIDIA's financial results last week attracted a great deal of attention. When the artificial intelligence investment bubble bursts, the first thing we will probably see is NVIDIA's performance. NVIDIA supplies the technology to perform the very complex calculations required for all artificial intelligence applications.

It not only sells the necessary hardware, but also operates its own servers, which it rents out via the cloud.
After beating expectations by 30-40% four times in a row, many investors expected NVIDIA to disappoint and then drag the whole market down. But they have once again managed to clearly exceed expectations. The turnaround has been canceled, the madness continues.

Institutional investors normally hold well-diversified and balanced portfolios. The chart shows how heavily institutional investors have been invested in momentum stocks since 2002. This includes growth stocks and, in particular, Magnificant 7. The weighting of institutional investors in growth stocks is higher than ever before.

This raises the question of who should continue to buy these stocks. Institutional investors are already so heavily invested that they are unlikely to buy any more. That leaves only private investors. Normally, this signals the end of a trend.

Fear of inflation
In a regular survey of institutional investors conducted by Bank of America, they were asked where they see the greatest risks for 2024.

The answers from February 2024 are in dark blue, the answers from January 2024 are in light blue and the answers from December 2023 are in gray. The fear of a hard landing, i.e. a hard recession, has subsided. Geopolitical risks are still considered to be high. At the top of the worry barometer is the fear of rising inflation. This fear receded in January, but is now back at the top again.

The chart shows the twelve growth cycles since 1950 and how high the increase in gross national product was in each cycle. The cycle that has been running since the Covid crisis has so far led to a 19% increase in gross national product in the USA. This is already the fifth largest increase in history.

What is worrying, however, is that although we have had one of the fastest and most massive interest rate hikes in history, growth is still continuing (albeit slowly).

The chart shows the annual change in inflation (light blue, CPI, Consumer Price Index). The development has a strong correlation with the Financial Condition Index. This index shows how easily companies can refinance and borrow. This index is normally an excellent leading indicator for inflation. If companies have improved opportunities for investment, this points to further growth in the economy and also to rising inflation.

The concern of institutional investors that inflation is rising again therefore has a real basis.

The likelihood of the US Federal Reserve lowering interest rates further in such an environment seems unlikely to us.

The chart shows the development of inflation from 1966 to 1984. This phase is often used as a comparison to the current situation. During this period, after a phase of negative interest rates, there was a sharp rise in inflation. If we look at the development of inflation from 2000 to the present day, we are following the script of the 1970s almost exactly. Back then, there were two further waves of inflation.

The chart shows the analysts' forecasts for corporate earnings in the USA (S&P 500), Europe (STOXX 600), Japan (Topix) and the emerging markets (MSCI EM). Corporate earnings in the USA appear to be completely decoupled from the rest of the world. This is mainly due to the development of new technologies. Companies such as Apple, NVIDIA and Amazon are driving technological change and benefiting from it. Nevertheless, a decoupling on the scale that is currently expected is not realistic in our view.

Where is the energy crisis?
Two years ago, the spectre of an energy crisis was still going around. The start of the war in Ukraine was expected to lead to a massive increase in oil and gas prices and a shortage situation. Germans were urged to take shorter showers and industry also had to save energy.

So far, no such shortage has occurred.

The chart shows the filling level of gas storage facilities in Germany (red). They are currently fuller than they have been for 10 years. The average filling level over 10 years is shown in dark gray and the highs and lows of the last 10 years are shown in light gray.

So we are currently in an excellent position, and if the stock build-up continues as in recent years, we will easily meet the new legal requirements of a fill level of 85% at the beginning of October and 95% by November.  So things should also look good for the winter of 2024/25, even if the war in Ukraine continues.
Why didn't there be a shortage? Have so many savings been made?

Energy was certainly also saved, but the main reason lies elsewhere. The USA has stepped in as a supplier. The chart shows how the oil sales of the USA, Russia and Saudi Arabia have changed in recent years. Since the fracking boom in gas production, the USA has gone from being an energy importer to an energy exporter.

The USA has not only been able to compensate for falling supplies from Russia, but also from OPEC (most important country Saudi Arabia), which wanted to push up the price of oil by reducing supply. In addition to the large arms deliveries to Ukraine, the USA has also saved us in the energy sector.

The USA has also earned a lot from this. Nevertheless, it is a win-win situation. Without the supplies, the price of gas and oil would probably be twice as high as it is today.