Corporate profits in the USA, debt and default rates, development of the unemployment rate in the USA.
Chart of the week
The chart shows the average annual performance of the stock market in America (S&P 500) since 1990 (black). In red is the current annual performance from 2023.
Why this is important
From August to mid-October, the return on the stock markets is usually negative. So it pays to keep the cash ratio a little higher during this time and hope for more favorable entry prices.
However, one should not miss the entry in the middle to the end of October. This is when the year-end rally usually begins.
Company profits in the USA
The earnings yield of each company can be calculated. This is the return on capital employed. This figure can be aggregated from all companies in the S&P 500 stock index. Currently, the earnings yield of the S&P 500 is 3.93%.
Bonds are considered to be a direct competitor to equities. A short-term 3-month U.S. government bond currently yields 5.3%.
The chart above shows the relationship between the earnings yield of the US stock market and short-term government bonds. If the line is above the zero line, it is worth buying stocks, if it is below, bonds are the better choice.
Currently, there is more to be said for investing in bonds than in equities. To change this, stocks would have to generate a higher profit yield. Currently, however, this does not look so rosy.
The earnings yield in the U.S. depends on fewer and fewer companies. Technology stocks already have a weighting in the S&P 500 of almost 30%.
So it is not surprising that single news from the technology sector moves the whole market. Last week, China considered an iPhone ban for all Chinese state employees, and Huawei unveiled a new cell phone processor that Americans believe should not exist. The U.S. hoped to prevent just that with the technology embargoes it has imposed in recent years. This bad news from the technology sector then dragged down the entire market last week.
The chart shows analysts' earnings revisions for 2024. For the USA, the situation seems to have stabilized somewhat. The earnings forecasts for 2024 have remained stable for several months and are not being lowered any further (but are not being raised either).
The situation is different in the emerging markets. They are seen as the biggest losers in an emerging recession.
In Europe, there have been no major downward earnings forecast revisions so far. Normally, Europe follows the US with a 6-8 month lag. So there could be some bad news to come.
The only one currently is Japan. After a stagnation of more than 10 years, something is finally moving again.
The chart shows how much imports from China have fallen in recent years. Instead, more is being produced in the USA or imported from Mexico. However, this reduces companies' margins, as production costs tend to rise.
Debt and default rates
We already referred to household savings rates and credit in the U.S. in last week's market report. The chart below combines both observations in one graph.
The chart shows the household savings rate (green) and the demand for credit card loans. The savings rate is falling and debt is rising. This is how the high consumption in the USA is currently being financed. This is not sustainable.
The chart shows the default rate on credit cards. This has already reached its highest level since 1991. It is only a matter of time before consumption also collapses.
But it's not just private households that are in crisis. Who still remembers the banking crisis in the spring? The press has been surprisingly quiet about it. During the banking crisis in the spring, the U.S. Federal Reserve had put up a bailout umbrella for banks, allowing them to absorb losses in long-term bonds. The amount of these loans is shown in the chart above, but inverted (blue). That is, the lower the blue line, the higher the loans that banks are demanding.
When the banking crisis is over, the demand for these emergency loans should actually have decreased. However, they have increased in recent months! But the stock prices of the U.S. regional banks have recovered. Something can't be right. In our view, it would not be surprising if the banking crisis caught up with us again.
Development of the Unemployment Rate in the USA
Initial jobless claims are published weekly in the USA. Last week, they fell further (chart below). At first glance, this is good news.
Initial claims have fallen back to the level of August 2023. This raises hopes of a further drop in the unemployment rate.
You have to look deeper into the figures to see that the rosy picture is crumbling more and more.
The chart shows the number of long-term and fixed jobs with permanent employment contracts. The loss or reduction of such long-term jobs is increasing. This means that although the unemployment rate is still falling, employees are increasingly only being offered fixed-term contracts. Companies are losing the confidence to hire long-term employees. This is usually a clear sign that the trend in the unemployment rate is about to reverse.
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Federal reserve strategy, inflation expectations in the U.S. and Europe, investor behavior in the U.S. Where are we in the financial market cycle?
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