Market report

Deceleration and disinflation, outlook Europe and Asia

October 17, 2022
Deceleration and disinflation, outlook Europe and Asia

Chart of the week

Source: Twitter, Sven Heinrich, @NorthmanTrader, 14.10.2022

The chart shows the annual return of a portfolio with 60% equities and 40% bonds. The return of such a portfolio is the worst since 1929.

Why this is important

2022 is one of the few years in which diversification did not pay off. The two main components of a portfolio, equities and bonds, both generated strongly negative returns. Such a case is very rare.

It is important now to stick to your strategic asset allocation and not change the structure of your portfolio. Adjusting the portfolio now in such a way that you would not have lost anything in that year leads to being wrongly positioned in the next 95 years.

Deceleration and disinflation

The title may be confusing, since everyone is currently talking about high inflation, but no one is talking about disinflation. Disinflation or disinflation refers to a reduction in the rate at which the price level rises, i.e. the rate of price increases decreases. Thus, disinflation refers to a decrease in inflation, but not a decrease in the price level.

Inflation figures continue to be very high and the publication of consumer prices of the week devastating and clearly above expectations. But the core data and the data under the surface are beginning to change. More and more signs indicate that the economy is now cooling.

- A great many profit warnings in the last week from companies

- Inventories are rising (for example, at Intel and in computers in general)

- Inflation expectations for 2023 are falling

- Bond markets have not reacted much to new negative data

- International Energy Agency sharply lowers expected demand for oil next year

- Order books of many companies are still well filled, but new orders are slumping

Source: Twitter, The Daily Shot, @SobertLook, 13.10.2022

The chart shows a summary of the U.S. District Federal Reserve Banks' surveys of firms' order books. The blue line shows the number of orders that have not yet been filled. Currently, order books are bulging at most companies, but no new orders are coming in, indicating a massive slowdown in the economy. In 2-3 months, this may lead to austerity programs and layoffs.

This week, the first companies reported their third quarter financial results. In the coming weeks, many will follow.

Source: Isabelnet, 15.10.2022

The chart shows how much analysts have raised or lowered earnings estimates in recent weeks. For the index, those analysts who increase their forecasts are subtracted from those who reduce their earnings forecasts. The index gives a good sentiment picture of the economy.
Currently, the index shows that the economy in the U.S. is cooling noticeably and most analysts expect lower profits at companies.

However, due to the so-called base effect, the main inflation figures are not expected to ease until October. Inflation is always measured with the change over one year. In September 2021, inflation rose by 0.4% and in October 2021 by 0.9%. The higher the increase a year ago, the higher the chance of a decline that year. Then, when the broad market reacts to the trend reversal in October, the pros have already positioned themselves.

But this does not mean that there will be further setbacks. For example, this week the average rents in the U.S. have risen as much as the last time in 1990. Such information always provides a damper. However, after 2-3 days of losses, the buyers immediately report back.

Source: YouTube Markus Koch Wall Street from 13.10.2022, Time stamp : 20.07

The last time the Fed raised interest rates as much as it is doing today was in 1973. The chart shows the path of the S&P 500 and inflation from 1970 to 1976. The turnaround in the stock markets did not happen when inflation was low again, but when the trend reversed from cooling inflation. That's why it's important to be invested now and not hold too much in cash.

The week, the markets were out of control. In some cases, there were intraday moves of close to 5%. Such strong movements are often seen when a major trend reversal is imminent.

Source: YouTube Markus Koch Wall Street from 11.10.2022, Time stamp: 2.39

This is another chart that shows how close we probably are to a trend reversal. The chart shows the number of stocks in the S&P 500 that are trading above the 200 day average. Currently, there are very few of them. Mostly, at this low level, there was a reversal after past crises and a move back to the long-term average.

Source: Isabelnet, 14.10.2022

The chart shows the valuation of European equities based on the price/earnings indicator. European equities are valued low in a historical comparison. Only during the Covid crisis and after the financial crisis were they valued lower.
On the other hand, it may be a bit too early for a big shift from US equities to European equities as long as the USD is so strong.

The USD is stronger than at any time in recent decades, but as long as interest rates in the US are massively higher than in Europe and the war in Ukraine continues, USD strength is likely to persist.

Source: Isabelnet, 14.10.2022

In Asia, China is the biggest player. The chart shows the development of the Hong Kong stock index since 1969. We are now at a critical mark where a turnaround should take place. The slump is mainly due to the weakness of the Chinese economy and the great uncertainty because of the real estate crisis.
The hope for better returns in China and also Asia, however, is based on the assumption that fundamentally nothing has changed. Until now, Asia and especially China was the factory of the world. However, due to supply chain problems and regionalization triggered by the Ukraine war, this could change significantly. Many Western companies are currently considering moving production from Asia to their home markets. It is currently difficult to estimate how strong these effects will be. A countervailing force is that China depends less and less on exports and more on local consumption, and will probably replace the USA as the world's largest consumer market in a few years' time.

The key here will probably be to focus on companies that benefit from local consumption in Asia and are less dependent on exports.

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