Market report

Get in now according to seasonality, Smart Money Index, Stocks vs. bonds. What's going on in Germany?

October 30, 2023
Get in now according to seasonality, Smart Money Index, Stocks vs. bonds. What's going on in Germany?

Chart of the week

Source: Isabelnet, 26.10.2023

The chart shows the average annual return of the S&P 500, the stock market in the U.S. since 1950.
Why this is important
We are now at the exact time when there is usually a trend reversal to the upside and the Christmas rally begins. However, caution is needed that year. Currently, investment sentiment is as negative as it has ever been and the market is in a downtrend.  
Last week, while excellent figures were published for the economy in the U.S., they were miserable for the stock market. The gross domestic product of the USA rose by 4.9%, had been expected 4.5%. Consumer spending also increased by 4%, as expected, and inflation increased by 2.4% (2.5% had been expected). This increases the pressure on the Federal Reserve to raise interest rates further.  

Smart Money Index

Source: Twitter, WallStreetCourier, @WallStCourier, 27.10.2023

In the stock market, a distinction is made between the money flows of hedge funds and institutional investors (smart money) and private investors (dump money). The assumption is that institutional investors usually have better information and invest more professionally, and private investors are often guided by the general mood and headlines in the media.
The Smart Money Flow Index (SMFI) is calculated using a proprietary formula developed by WallStreetCourier that measures the performance of the Dow in two key time periods: shortly after the open and in the last hour of trading.

The chart shows the Dow Jones Stock Index in blue above and the Smart Money Index in red below. Currently, hedge funds and institutional investors are pulling out of the market and selling due to high uncertainty.

There is one bright spot, however.

Source: Isabelnet, 24.10.2023

In a survey by the bank J.P. Morgan, 52% of its institutional clients say they plan to buy stocks again in the next 2-3 weeks. However, this figure has been rising since the correction on the stock markets began. It is difficult to say exactly when institutional clients will start buying again.

Equities vs. bonds

Source: Isabelnet, 26.10.2023

The chart shows the order of the main asset classes in each year since 2000. Each asset class has the same color every year. The asset class with the highest return is at the top, the asset class with the lowest return is at the bottom.

What is striking at first glance is that the distribution of the colors is random and can hardly be predicted. There are only a few regularities:

- The asset class that is at the top in one year is often also the worst once in the next 2-3 years

- The stock market (S&P 500, dark blue) is mostly in the top half and was only once, in 2003, the worst asset class in a year.

- Commodities (light green) are mostly either at the top of the ranking or at the bottom, but rarely in the middle.

- High-yield bonds are mostly in the midfield. They were never at the top, but never the worst either.

In general, however, it can be said that a reliable forecast is almost impossible. Therefore, it makes sense to diversify one's investments and not to focus all one's assets on one asset class.
It is important to combine asset classes that complement each other well. Here, investors largely use equities and bonds.

Source: Isabelnet, 25.10.2023

The chart shows in which years stocks and bonds developed in the same direction and in which they did not and were then a good complement. On a long-term average, stocks and bonds are not really the best combination. However, in the past 20 years until 2021, this was the case. Currently, however, we are again in a phase in which equities and bonds both gain or lose value at the same time.

Source: Twitter, Luke Gormen, @LukeGormen, 27.10.2023

Another important piece of the puzzle in the investment decision is the level of interest rates. If it exceeds a certain level, often 5%, investment decisions generally shift. Last week we already showed that US government bonds now have a higher yield than real estate investments. The chart above shows that this is now also the case for emerging market bonds.
For a rational investor in the U.S., it pays to invest in risk-free government bonds rather than real estate or emerging market bonds.

Bonds, unlike stocks, do not have the characteristic that long-term investors can hide the losses. If one holds a bond until it is redeemed, losses incurred during the life of the bonds will be recouped. The only thing that has to be certain is that the debtor will still exist when it is repaid. Which is usually the case with government bonds of industrialized countries.
That's why we are increasingly using government bonds with a term of 1 or 2 years again in our customers' investment portfolios and generally hold them until repayment.

What's going on in Germany?

Source: YouTube, Mario Lochner. 28.10.2023, Time stamp 5.27

The chart shows in blue the interest rate hikes that have already taken place and in red investors' expectations. An interest rate peak is therefore also emerging in Europe.
At the same time, growth remains positive.

Source: Statista, IWF Prognose, 10.10.2023

The chart shows the expected growth rates of the economies of selected countries. The IMF (International Monetary Fund) has raised its growth forecasts for most of them. Except in Germany and China, but there at a very high level.

Source: YouTube, Mario Lochner. 28.10.2023, Time stamp 3.35

The graph shows the development of the production of all sectors that require a lot of energy in blue (car manufacturers, steel companies,...) and in red all sectors that require little energy (mainly the service sector).
Energy costs in Germany are now twice as high as in France or Holland and 2.5 times higher than in Poland.

So it is only a logical conclusion that the energy-intensive production will move out of Germany, including all jobs. The rest of the industry can absorb some jobs, but by far not enough.
Private individuals also have to dig deeper into their pockets. For example, the cost of light heating oil has risen by 173% in the past three years. But costs for renewable energy sources such as firewood pellets (+70%) or district heating (+70%) have also risen sharply. Everyone is being asked to pay for the conversion of the energy infrastructure.

Currently, the restructuring is not working. For example, the largest share of electricity imports is nuclear power (12.6 terawatt hours). To compensate for this with natural gas (import of 5.1 terawatt hours), the capacity of LNG terminals would have to more than triple.

In a remarkable lecture, the former economist Hans-Werner Sinn calculated that for a complete conversion to renewable energies in Germany, about 200 large energy storage facilities are needed. Currently, Germany has 7 and 9 are planned.

The conversion of the energy infrastructure will therefore take years, with high costs and an uncertain outcome.

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