Strong growth figures in the USA, uncertainties due to unrest in the Middle East.

Chart of the week

The chart shows the return of the broad US market index S&P 500 and the return of the most important sectors, over the last two years. Except for energy and technology stocks, there were no good returns.

Why it matters
Over the past two years, a broadly diversified portfolio has not been able to gain much. Is 0.5% over the past two years in the S&P a bad return? The answer is yes.
Over the past 20 years, the average annual return has been about 10%. From that perspective, the result is poor. If you had the ideal timing, of course there would have been more, but there would also have been a lot less. If one had entered at the high of October 2022, one would now have generated losses of -13%.

Strong growth figures in the USA
Last week, some important economic figures were published in the US. The labor market figures were above expectations, but also producer prices and consumer prices were strong. As before, the figures do not testify to a slowdown in the economy.
This, of course, increases the pressure from the Federal Reserve to raise interest rates further.

The chart shows the development of the stock index (S&P 500, purple) and producer prices. The ISM Manufacturing Index has been a good indicator of stock market performance for years. It's also logical. When more is produced, companies usually make higher profits.
Currently, however, the stock index has almost completely decoupled from producer prices. Investors are anticipating a strong economic recovery. This is dangerous, as a recession is just around the corner. Just the slightest disappointment in producer prices is likely to cause the stock market to plummet.

The chart shows monthly inflation for two years and which components it consists of. Compared with last month, inflation in the US has picked up again. From 3.0 to 3.7%.
The chart shows that the decline in inflation since June 2022 is almost entirely due to lower energy prices. As energy prices had already risen again in September, the markets had expected higher inflation. The course of energy prices will be decisive for inflation in October.
Here, the course of the war between Israel and Hamas will play a major role.
What continues to weigh additionally on the market is the declining liquidity provided by the central banks.

The chart shows the change in liquidity (red) and the performance of the S&P 500 stock index (black). The correlation has been very high in recent years. Again, the stock index is performing far too well compared to the liquidity provided by central banks. This makes the stock markets vulnerable to further corrections.

Decreasing liquidity is not just a phenomenon in America, however; all central banks around the world are reducing liquidity. The chart above shows how central banks around the world are reducing their balance sheets and thus shrinking the money supply.

Uncertainties due to unrest in the Middle East
What kind of world are we living in? War for years in Ukraine and now the war between Israel and Hamas. Wherever you look, immeasurable suffering for the civilian population. Both wars, which will leave only losers on both sides.
No one currently knows how the situation will develop. How do you invest in such uncertain situations?

Poker players are often good investors and vice versa. A poker player analyzes the cards, calculates the probabilities and acts accordingly. If he has no data and cannot calculate probabilities, he throws down his cards and waits for the next game. In other words, he minimizes his risks.
The stock market hates uncertainty. Investors reduce the risks and usually sell shares.

With hedge funds, the reduction of risks runs a bit more complicated. Hedge funds usually take large loans and invest with a leverage of 10 or more. When they reduce risk, they sell the fundamentally good stocks they hold and buy back the bad stocks they were short. This leads to a phase in the stock market where good quality stocks perform poorly and bad companies increase in value. This is exactly the movement you could see last week.
The stock market is often very brutal and unemotional. What is currently occupying the stock market is the development of the oil price. What is often overlooked here are the deep current oil reserves.

The graph shows the oil reserves in the USA, together with the strategic reserves of the US government. The level is the lowest since 1987!

The graph shows the same relationship. The number of days the U.S. would go without oil supplies is only 46 days. This is the lowest value since 1982.
Into this tight supply situation now comes Israel's war with Hamas. Certain politicians in Israel have proposed destroying Iran's rammed oil infrastructure with missile attacks. This would completely deprive Iran of its financial resources and they would no longer be able to support Hamas.

The graph shows the development of the oil price since 1970 and the various crises marked in red. The current crisis is often compared with the Yom Kippur War. At that time, the oil price increased almost tenfold.

Currently, no one hopes that it will come to that.
An explosion in the price of oil would drive the world into a major recession. In the USA, no president has ever been re-elected in a recession. The U.S. government under President Biden, who must stand for re-election next year, will do everything in its power to ensure that this does not happen. Will the U.S. succeed in restraining Israel?
After this heavy and negative reflection, a ray of hope at the end:

The chart shows a market indicator calculated by the investment bank Morgan Stanley that shows investor sentiment. Investor sentiment is currently at an extremely low level. Normally, this is a good time to enter the stock markets.