Shares the best long-term value investment, Robust economy and falling inflation

Chart of the week

The chart shows the return of the three asset classes equities, bonds and gold after deducting inflation since 1800.
Why this is important
When investing money on the stock market, there is no way around stocks. After deducting inflation, stocks clearly have the best long-term return. However, stocks fluctuate strongly in some cases. That's why you need a long-term investment horizon of 7 to 10 years. Gold is a good crisis insurance, but with +0.75% return per year, gold could only just compensate for the loss of purchasing power due to inflation.
Robust economy and falling inflation
Last week, more companies announced their business results for the second quarter of 2022. On average, the results were above expectations and indicate that the economy, at least in the US, is stronger than many had thought.

The chart shows how the margins of companies in the S&P 500 have developed since 2015. At the beginning of the announcement of the earnings results for the second quarter, many were still expecting lower margins. So far, those fears have not materialized. This gave the stock market a boost last week.
Then, in the middle of the week, the inflation figures for July were published. For the first time in a long time, they are down.

The chart shows inflation in the USA. Dark blue is the inflation rate and in light blue is core inflation (inflation minus energy and food). The dashed line shows average forecasts for inflation through the end of 2023.

Both published figures were lower for July than the previous month. This led to a sigh of relief, among investors. It seems that the central banks have now succeeded in breaking the rise in inflation after all.

The chart shows the probability that investors expect the Federal Reserve to raise interest rates by another 0.75% in September. At the beginning of August, following the announcement of the labor market figures, the probability rose sharply, but has now fallen sharply again. Less sharp rises in interest rates are currently helping technology stocks in particular.

The chart shows the increase in consumption prices in the service sector (red, sticky inflation) and in the rest of the market (blue, flexible inflation). Inflation in the service sector is considered to be particularly damaging, as it is mainly driven by the increase in wage costs, which is not very flexible. When wages rise, they rise permanently and can be reduced badly.

It is therefore too early to breathe a sigh of relief. The lower inflation figures in the month mask the increase in the service sector. Prices are still rising in that sector. As a result, companies' fixed costs are also rising.
Since the low in June, the stock market has gained 12% in Europe and 17% in the US. Investor sentiment has improved massively.

The chart shows the current "Fear and Greed" index above and the historical trend below. As a reminder, when all investors are extremely fearful, there is often a turning point to the upside. Conversely, when all investors are extremely positive, there is often a correction. So the index is a typical contra indicator.
Since the low point in May, when "extreme fear" prevailed, the stock market has made good gains. We are already about to enter the "greed" phase again in which all investors who missed the turnaround are chasing the market.
This does not mean that a counter-correction will come next week, but the air is getting thinner.

Additional image sources: Initial graphic Designed by Freepik