Buying panic on the stock markets, first positive signs, but no all-clear

Chart of the week

The chart shows the development of inflation in the U.S. since 2019. The chart shows the three main components of inflation: headline inflation, energy and food. Because energy prices and food prices are often very volatile, many only look at headline inflation. Circled in red is the unanticipated large drop in inflation.

Why it matters

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On Wednesday of last week, the new inflation numbers in the US were published. These were a lot better than expected. This led to fireworks on the stock markets. A daily increase of 5 to 7% is very rare.
We have often pointed out in this blog that exactly such a movement is possible, because the majority of investors are very pessimistic and many have hedged their portfolios.  
The stock market in the U.S. opened 3% higher directly on Wednesday. This can then lead to forced buying by those who bet on a falling stock market with borrowed money. Then add in those investors who are totally under-invested and fear they will miss out on a good return. This can lead to an extremely strong spiral to the upside.

Wednesday's date has the potential to be called the date of the interest rate turnaround for years to come. The data could lead to a rethink by the Federal Reserve and break the momentum of extremely high rate hikes.
First positive signs, but no all-clear

The chart shows what interest rate investors expect in July 2023. The central bank is expected to raise the key interest rate in further steps up to a maximum of 5 to 5.5%.  Currently, it is between 3.75 and 4%.

What's important here is the chart at the bottom and how expectations have changed since last month and since last week.

Just a month ago, the peak was expected to be between 4.75 to 5%. Due to the tighter communication from the central bank since the last rate hike, expectations have changed and the peak was newly expected at 5.25 to 5.5%. Within a few hours, the expectation has returned to the level of a month ago.

On the one hand, this explains the big move in the markets, but it also puts the move in a clear context. Expectations have just returned to where they were a month ago, and we have at least another year of rising interest rates to look forward to. For us, this is no reason to completely change our investment policy now. Cautious investing with a focus on value stocks still seems to us to be the right strategy.

The chart shows the components of inflation that often fluctuate widely (flexible inflation, blue) and the ugly part of inflation that, once there, does not go away (sticky inflation, red).
Sticky inflation is particularly about wage increases in the service sector.

For all the euphoria over last week's inflation numbers, sticky inflation is still increasing and shows no movement downward.
Historically, moreover, a turnaround in interest rates at a level of 5 to 5.5% would be rather low:

The chart shows the level of key interest rates since 1915 and the turning points are marked in red. A turnaround at just over 5% would be the third lowest since 1915.

The chart shows the demand for mortgages in the USA. This indicator shows very early on how the entire construction industry in the USA is developing. Demand has collapsed by almost 90%. Other indicators show a similar picture, the US economy could cool down much more than expected, indeed there could be a very severe recession.

The chart shows the stock market performance of the S&P 500 from October 2021 to today (black) and from 1973 to 1974 in red. In 1973, there was a great recession, which is why the pessimists compare today's situation with that time.
We think the probability of such a development is small, but still points out that it is not appropriate to break out in euphoria because of a single better inflation number.
Since October 2021, growth stocks plummeted as interest rates rose sharply.

Die Grafik zeigt die Rendite von Wachstum (Growth) und Value (Substanz) Aktien im Verhältnis zueinander. Ob die letzte Woche jetzt bereits die Wende war, glauben wir noch nicht. Eine gewisse Erholung der Kurse wird sicher stattfinden, aber die Wende, dass Wachstum wieder nachhaltig besser rentiert, wird auf sich warten lassen, solange die Zinsen weiter steigen.

Historisch gesehen war die aktuelle Lage mit einer ersten Abkühlung der Zinserhöhungen der Startschuss für die Out-Performance von kleinkapitalisierten Aktien.

The chart shows the mega-caps, i.e. the very large companies in the USA. They have driven the index up massively in recent years. This trend now seems to have been broken. This is due in particular to the large technology stocks such as Meta, which are currently making headlines with mass layoffs.
Nevertheless, we are somewhat cautious to bet on this trend at the moment.

The chart shows how optimistic the CEOs of small companies in the USA are. Optimism is lower and pessimism higher than during the Covid crisis.

If the company bosses already do not believe in a turnaround, it is perhaps still a bit too early to bet on such companies.