Why do we always show graphs from the U.S., stock markets and economic development decouple, the unloved September.

Chart of the week

I have been asked by readers why I always comment on charts from the USA and almost none from Europe or Switzerland.
The graph shows the development of the gross domestic product (GDP) in the individual regions. GDP indicates the total value of goods and services generated as final products within the national borders of an economy during an economic year.

The USA is the world's largest economy. China is catching up strongly and is expected to overtake the USA in about 5 years. The USA and China account for 40% of global development. Europe only 15%.

Why this is important
In the past, it has been shown that recessions, but also economic recoveries, usually start in the USA and Europe follows the same development over a period of 6 to 12 months.
So if you analyze the development in the USA, you can see what will follow later in Europe.
There are other reasons why the U.S. leads the way in economic analysis:

- In the MSCI World, the most widely followed stock index in the world, stocks are weighted according to the size of their market capitalization. Currently, the weighting of the USA is about 70%. Many stock portfolios have a similarly high weighting of the USA. Therefore, it is logical to focus on this market first.

- Most of the new business models and companies that change the world come from the USA: Apple, Google, Amazon, Uber, Tesla,...

- The US dollar is considered the world currency. Almost 90% of commodities are traded in USD. As soon as uncertainties arise elsewhere in the world, investors flee to the USD.

- The US communicates economic numbers (growth, unemployment, etc) more often and faster than other countries. If you look at the US, you can guess what will happen in the other countries.
Many countries now calculate economic figures similar to those in the US, but the US has been doing it for much longer. You have a much larger history with U.S. data and can see long-term relationships better.

- The central banks of the world have a mandate to fight inflation. But the U.S. Federal Reserve has the additional mandate of ensuring full employment. That's why the Fed often acts faster and more agile than any other central bank in the world.
In connection with the above-mentioned reasons, this often leads to the U.S. central bank being the first to react and all others following later.

Dieses "Monopol" der USA an den Finanzmärkten wackelt aber. China holt auf. Ökonomisch, militärisch und strategisch. In ca. 5 Jahren, dürfte China den weltweit grössten Konsummarkt haben. China unternimmt auch viele Anstrengungen den Renminbi, als neue Weltwährung zu etablieren.

The chart shows which countries export more to the US than to China (blue) and which countries export more to China than to the US (red). From 2000 to 2020, the dependence has shifted strongly to China.
So, in addition to many graphs from the US, I will show more graphs from China in the future.

Stock markets and economic development decouple

The chart shows the US Manufacturing Index (yellow) and the S&P 500, the main stock index in the US (purple).
The ISM manufacturing index, also known as the purchasing managers' index (PMI), is a monthly indicator of economic activity in the US. It is based on a survey of purchasing managers at more than 300 manufacturing companies. It is considered a key indicator of the state of the U.S. economy. The new index level is published every month on the third working day.
As can be seen on the chart, the development of the two indices is very similar. Except in recent months. The ISM has recovered slightly (+1.2), but the stock market has risen much more than would be justifiable from the state of the economy. Either the ISM will rise massively in the next few months, or the stock market would have to fall to close the gap.

The chart shows the development of key interest rates in the USA (dark blue) and the number of job vacancies (light blue). Currently, the unemployment rate is still historically low. If the economy cools down due to the sharp rise in interest rates, this will first be seen in the number of job vacancies. If this falls sharply, the unemployment rate will also increase. As expected, the number of job openings is now declining. This is a first sign that the economic development is cooling down.

Last week, we wrote about consumption in the USA. This is increasingly financed with credit. The chart shows how much consumers in the U.S. were able to save during the COVID period (blue line), but how much these savings are declining. Included in these numbers are the COVID checks that every American received. In -1-2 months, all the savings that could be built up during the COVID crisis will likely be gone. By then, at the latest, consumption will decline.

There are increasing signs that a recession is looming in the US. The chart below shows how the unemployment rate and interest rates normally behave in such a phase. The chart shows the average values of all recessions since 1969.

On the time axis, zero is the point in time when the unemployment rate starts to rise. To the left of this is the development in the 260 days before and to the right of this is the development in the 260 days after.
When the unemployment rate begins to rise, long-term interest rates (red, 10-year Treasury bond) move sideways or slightly downward. Short-term interest rates (blue, 3-month government bonds) move sharply lower. This has to do with the fact that the inverse interest rate structure (short-term rates high, long-term rates low) is reversing back to the normal yield curve (short-term rates low, long-term rates high).

The conclusion from this is that it is now time again in the U.S. to add government bonds to the portfolio. The risk of capital losses is decreasing.

The chart shows the annual yield in ten-year U.S. Treasury bonds since 1787. Since the beginning year, the yield has been negative. This would be the first time since 1787 that the yield has been negative for 3 years in a row. Again, this suggests that now might be a good time to buy U.S. Treasury bonds.

The unloved September.
September is historically considered one of the worst months for the stock market. Almost all crashes in stock market history happened in September.

The chart shows the average monthly return since 1960. September is clearly the worst month here. Later in October, the Christmas rally usually begins.

The U.S. bank JP Morgan has asked all major fund managers whether they are more likely to increase or reduce their equity position in September. Over 70% plan to reduce their equity exposure. This suggests that we will see a poor September return again this year.