Market report

Interest rates are falling in Europe, but not in the USA. Microsoft, Apple and NVIDIA are now worth more than the whole of China.

June 11, 2024
5 min.
Interest rates are falling in Europe, but not in the USA. Microsoft, Apple and NVIDIA are now worth more than the whole of China.

Chart of the week

Source: X, Christophe Barraud, @C_Barraud, 06.06.2024    

The chart shows the market capitalization of all Chinese stocks (red) and the market capitalization of Microsoft, Apple and NVIDIA.

Why this is important
The chart illustrates with another example how absurdly high the three stocks of Microsoft, Apple and NVIDIA are valued. As of last week, the market capitalization of the three stocks is higher than the valuation of the entire Chinese market.
We have been talking about these absurdly high valuations for a long time. Nevertheless, the artificial intelligence argument goes on and on.

Source: X, Bespoke, @bespokeinvest, 06.06.2024  

The chart shows the return on the US stock market (S&P 500, dark blue). The development is shown in red without the return of NVIDIA (light blue) and in light blue without the Magnificant 7.

Anyone who had NVIDIA or none of the Magnificant 7 stocks in their portfolio had to accept an underperformance of almost 10% in 2024 compared to the broad benchmark.
After many investors (like us) had invested in value stocks in the face of an impending recession, they were not rewarded.

Source: X, Lance Roberts, @LanceRoberts, 06.06.2024

In 2024, the outperformance of growth stocks has picked up speed again.

Interest rates are falling in Europe, but not in the USA.
In Europe, the European Central Bank (ECB) cut interest rates for the first time since 2019. At the same time, economic figures were published in the US, making a rate cut unlikely.

Source: X, Philip Pilkington, @philippilk, 07.06.2024  

The fact that the ECB has lowered interest rates can be interpreted in two ways:

- Low interest rates are good for the economy. Loans become cheaper and companies can finance projects that could not be financed with high interest rates. Margins increase for companies and growth is facilitated.
If you interpret it that way, the stock market should rise.
- Growth in Europe was low, but there were no signs of a recession. Central banks intervene when inflation is too high or there is a risk of recession.  
The ECB has now made it clear that it is convinced that a recession is imminent without lowering interest rates. In other words, the European economy is doing much worse than many people think.
If you interpret it that way, the stock market should fall.

Source: X, Oxford Economics, @OxfordEconomics, 07.06.2024  

The chart shows a graph from Oxford Economics, representative of many forecasts. Most of them assumed that the economy in Europe was already recovering slightly, even without the interest rate cut.
After all, the ECB's mandate is to fight inflation. It is therefore astonishing and not really comprehensible why the ECB raised inflation expectations at the same time as the interest rate decision.
So far, none of the reactions described above have occurred. After the announcement of the decision, the stock market initially rose 0.5% and then fell 1%. Investors have therefore not yet clearly chosen one of the two sides.
However, one aspect still needs to be considered. This is government debt. High interest rates not only affect companies, but also governments. Lower financing costs mean relief primarily for countries with high levels of debt, such as Italy, Portugal and France. Another EUR crisis is less likely.

Source: X, Equity Clock, @EquityClock, 07.06.2024  

The chart shows the development of new jobs created each month in the USA. In green is the trend in 2023, in blue the average of the last 20 years and in red the current figures for 2024.
Newly created jobs have therefore increased at roughly the same rate as last year. So no sign of a cooling economy. In contrast, the unemployment rate has risen slightly, which is confusing.
It may seem impossible that the unemployment rate rose while the economy was creating so many new jobs. But the monthly employment figures and the unemployment rate are derived from two different surveys and they can sometimes give conflicting messages.
Some economists are convinced that the surprisingly high increases in employment figures could be partly due to strong immigration, which has increased the number of people looking for work. This could mean that the labor force is growing without increased competition for workers.
However, the unemployment rate is based on a smaller survey and can fluctuate from month to month. As a result, investors focused on the jobs and payroll numbers on Friday, at least initially, prompting many to reduce their bets on a rate cut by the Federal Reserve this year.

Source: X, Otavio (Tavi) Costa, @TaviCosta, 07.06.2024

The chart shows the annual change in newly created full-time jobs in the USA. Even though many jobs have been created, it is clear that the economy is creating more part-time jobs than full-time jobs. This is usually not a really good sign.

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