Market report

From the fear of a recession, to the fear of inflation.

April 24, 2024
4 min.
From the fear of a recession, to the fear of inflation.

Chart of the week

Source: Isabelnet, 19.04.2024

The chart shows a Bank of America survey of the largest institutional investors on whether a recession is unlikely in the next 12 months. In November 2022, 90% expected a recession, now only 10% do.
Why this is important
The chart is an excellent illustration of the change in sentiment on the stock market. For most investors, the matter is clear and there will be no recession, even after the historically sharp rise in interest rates in recent years.

We do not share this optimistic view "yet". Since the US Federal Reserve has been in existence, there have been 15 interest rate hikes and 14 recessions. We consider the mood of most investors to be too optimistic.
But our opinion could soon change. The following chart could change our minds:

Source: Isabelnet, 23.04.2024

The chart shows the Purchasing Managers' Index for the manufacturing industry (dark blue) and incoming orders (light blue). A value below 50 indicates a shrinking economy, a value above 50 indicates an expanding economy.

In 2024, the global economy has returned to expansion. The recession in the manufacturing sector should therefore be over.

As the increasingly important service sector has never been in recession, mainly thanks to the topic of artificial intelligence, many have not noticed the crisis in industry.

Sorce: Isabelnet, 23.04.2024

The chart shows a survey conducted by Bank of America among the largest institutional investors on where they see the greatest risks in the next 12 months. The fear of a recession (economic hard landing) is falling sharply. However, many are worried that inflation figures (mainly due to geopolitical problems and a rise in the price of oil) could surprise us negatively.

Source: Isabelnet, 23.04.2024

The chart also shows a survey conducted by Bank of America, but this time exclusively among institutional bond investors. On a positive note, over 60% of investors expect inflation to remain the same or fall. However, 35% still expect inflation to rise. At the beginning of the year, this figure was still close to 0%.

Source: CNN Business, Fear & Gread Index, 23.04.2024

The chart shows how euphoric the mood among private investors was. It was at peak levels from December 2023 to March 2024. The wind has changed since April. This was triggered by disappointments in some of investors' favorite stocks such as Tesla or Nvidia, which have slumped in recent weeks.

But that was only the trigger. We have been warning about the correction for several weeks. With the turnaround in interest rate expectations, it was only a matter of time before prices adjusted to reality. We also think that the correction is not over yet.
What continues to worry us is the inverted yield curve:

Source: X, Charlie Bilello, @charliebilello, 19.04.2024

The chart shows the development of ten-year US government bonds minus two-year US government bonds. Normally, long-term interest rates are higher than short-term interest rates, as there is more uncertainty in the long term. However, short-term interest rates are currently higher, which is called an inverted yield curve.

In the past, this was always a sign that a recession was coming. Although equity investors are very optimistic and are calling off the recession, bond investors still seem to be expecting a recession. Historically, bond investors have usually been right. For the most part, it is long-term and institutional investors such as pension funds who are not guided by media sentiment.
The decisive factor for the economy is how easy it is for them to access credit to finance their business. The situation has improved significantly for many companies since November 2023:

Source: X, Lance Roberts, @LanceRoberts, 22.04.2024

Bloomberg calculates an index that shows how easily companies can finance themselves. One of the most important values is of course the level of interest rates, but other indicators are also included in the calculation. The most widely observed index in this area is that of the Federal Reserve Bank of Chicago, which includes 105 data points.

A higher value in the index means easier financing options. The index has been falling again since March. At the beginning of the year, seven interest rate cuts were expected, but now only two:

Source: CME FedWatch, 23.04.2024

The chart shows the probabilities with which investors expect the US Federal Reserve to make an interest rate decision. At the next meeting of the US Federal Reserve on May 1, investors assume with a probability of 99.7% that key interest rates will remain unchanged. However, a rate cut of 0.25% is then expected in September 2024 and January 2025.

Today's investments are tomorrow's earnings. In addition to the inverted yield curve, what worries us is that although financing options have improved over the past year, companies have not invested and there has been almost no demand for loans.

Source: X, Equity Clock, @EquityClock, 22.04.2024

The chart shows the demand for corporate loans in the USA. The blue line shows the average course of demand over the last 20 years. In 2023, the demand for corporate loans was falling and 2024 appears to be heading in the same direction.

So far, companies do not seem to believe in a bright future and are still reluctant to make additional investments. Only when this changes will we reconsider our current very cautious and conservative investment policy.

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