China disappoints, earnings season begins in the USA

Chart of the week

The chart shows the average return of the S&P 500 on different weekdays since the beginning of the year. Longer-term studies also show a similar picture.

Why this matters
For long-term investors, such patterns are of little interest, but for more short-term investors they are. Thus, it is worthwhile to make purchases on Thursday and sales on Tuesday.

The reasons for this pattern of returns are not entirely clear. One influence is certainly that some important economic data, such as the decisions of the U.S. Federal Reserve, are announced on Wednesday evening or after the close of the stock market.  

China disappoints
Last week, poor figures on economic development in China put pressure on stock markets around the world.

In Europe, there was a boom in the economy after the lifting of COVID restrictions. Consumers, who had been holding back for a long time, had a great need to catch up after COVID.

China did not lift all COVID restrictions until January 8, 2023. Most market observers expected a similar reaction from consumers in China as in Europe and the US.
At the same time, the real estate crisis seemed to be over. As a reminder, Evergrande, the second largest real estate group had to be rescued by the state. Many investors lost a lot of money. Many Chinese held 2-4 apartments as speculation on strongly rising prices in the real estate sector. However, some of the prepaid apartments were never built. The whole market of real estate developers collapsed dramatically. Since January 2023, however, the crisis seemed to be overcome.

The chart shows the sales of apartments by real estate developers in China. From January, the crisis seemed to be overcome and the sale of apartments picked up again. Now, last week, a 30% drop in sales was reported again. The throws a spotlight on the poorly performing economy.

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Presumably, however, both observations, no COVID recovery of the economy and re-emerging housing crisis, are closely related. The middle class has no money to spend until housing prices rise and they can sell homes.
A looming recession in the U.S. and Europe and a poorly performing economy in China that cannot offset this is not good news for global economic development.

Earnings season begins in the USA
This weeks the first companies in the US will publish their earnings for the second quarter of 2023.

The chart shows how analysts change earnings estimates over time. T=0 is the time when the first quarterly results are published. Already 80 days before this date, analysts are steadily reducing their expectations. The green line shows the average of the last 10 years. As a rule, analysts reduce their expectations too much and the results then surprise positively.

This may be because rarely is an analyst criticized if the company does better than expected, but an analyst may even lose his job if he is too positive and the company crashes after the results are announced.
For second-quarter 2023 earnings estimates, there have been far fewer reductions in the past 80 days than in the past three quarters. This poses the risk that forecasts may not be met in the quarter.

The chart shows the average annual return of the S&P 500 Index since 1990 (black line) and the current annual performance of the index in 2023 (red line). As a rule, the quarterly results of the second quarter of the year did not manage to positively influence the markets.

This chart is also the basis for the stock market rule that says to sell in May and buy again in October (Sell in May and go away, but don't forget to comeback in Spetember or October).