The interest rate turnaround finally reaches Europe

Chart of the week

The chart is from Goldman Sachs and shows how many mini futures have to be bought to move the stock market in the US by 1%. Mini futures are mainly used by private investors and shows how euphoric private investors are. Currently, a very low volume is needed to move the market 1%. This shows that currently almost no private investors are active in the markets. Last year's euphoria has vanished into thin air and pessimism prevails.

Why this is important

Liquidity in the markets has decreased noticeably. Surprising news can therefore move the stock markets very strongly. We will have to be prepared for very volatile markets in the coming months. Movements of 3-5% in one day can occur at any time.
In such market phases it is very important to have a long-term investment plan and horizon, and not to change one's investment policy panic-like on one day.

The interest rate turnaround finally reaches Europe

For more than eleven years, the European Central Bank (ECB) has not raised key interest rates: This phase is coming to an end. At Thursday's meeting, the ECB decided to end net asset purchases as of July 1 and announced a 25 basis point increase in key interest rates this month. Another 0.5% hike in September seems likely in this scenario.

High inflation did not leave the ECB much choice. Inflation in the euro area was 7.8% in April and 8.1% is expected for May. The figures for May will be announced next Friday. It should be one of the most important publications of the week. High fluctuations in the markets can be expected.

The announcement of the ECB has caused the stock market to fall sharply. What unsettled investors was not the rate hike itself, but the very gloomy outlook of the ECB.

The chart shows the expected interest rate hikes by central banks worldwide over the next few years. After years of low interest rates, the change will be painful. An increase from 0.4% to 2.8% in the USA is a sevenfold increase in interest rates. People who have financed their home with a high mortgage are likely to face hard times.  

Panic over high inflation and lower growth in America

The inflation figures published in America on Friday were much higher than anyone had expected. They are the highest in 40 years! At the same time, consumer confidence is the worst it has been in 52 years. The turnaround in interest rates and the rise in oil prices are unsettling a great many Americans.

The chart shows how much new credit card debt is being taken on in America. We saw the highest ever two months ago and the second highest ever last month. It seems like Americans are consuming like crazy and all on credit.

The chart shows the savings rate of US Americans. This has also reached a historically low level. Approximately at the level of 2008.
In our view, this data also suggests that consumption will decline sharply in the coming months. A further interest rate hike would actually no longer be necessary, and could even cause great damage.

Last week, one of the headlines in the market report was First Signs of Slowing Inflation Momentum. We still believe in these positive signs. Therefore, last week's corrections are clear buying opportunities. However, a new low for the year on the stock markets in America is still in the cards.  

Investors are still shifting heavily from cyclical stocks (auto, industrial, machinery,...) to defensive stocks (daily goods):

The chart shows the difference in valuation (forward P/E, future expected price/earnings ratio) of cyclical and defensive stocks. Earnings expectations for cyclical stocks are plummeting and those for defensive stocks are rising sharply.

This still shows that many investors expect a recession. Based on these expectations, defensive stocks are also currently being sold and cyclical stocks bought. However, the chart also shows that there are always countermovements. The valuation of cyclical stocks is now so negative that even small positive news can lead to a strong countermovement.

A well-diversified portfolio should therefore always contain cyclical and defensive stocks.

Good entry for Amazon after 96% drop in value?

The diligent newspaper reader will ask, "What's that all about? I haven't read anything about that." That is, of course, entirely correct. It did not, but it did take place. On Monday, Amazon opened at USD 122.35. Amazon's first 1-for-20 stock split in 23 years.

The chart shows the average return of stocks after a split since 1980. The statistics paint a clear picture, stocks after a split are worth buying, and as a rule they deliver a much better return over a year than the broad market.

A stock that has a smaller nominal value is often bought more often. An investor who wanted to invest USD 10,000 could not previously include Amazon in a diversified portfolio. The purchase would have represented almost 30% of the portfolio. In addition, options are usually traded in a block of 100. Amazon was therefore extremely expensive for options investors and it was effectively almost impossible for retail investors to buy options. This is now changing and could boost demand for the stock.