Market report

Investment behavior in times of crisis, new earnings season begins, debt in America at record levels.

October 10, 2022
Investment behavior in times of crisis, new earnings season begins, debt in America at record levels.

Chart of the week

Source: Isabelnet, 07.10.2022

The chart shows the annual change in the federal funds rate. The federal funds rate is the interest rate at which U.S. financial institutions lend money to each other to settle their balances under reserve requirements at the Federal Reserve.

Why this is important

The chart shows how extraordinary the current situation on the bond market is. Since 1950, there has been no rise in interest rates comparable to the current situation.

Source: Twitter, Mohamed A. El-Erian, @elerian, 08.10.2022

The chart shows the interest rate hike cycles of the Federal Reserve (FED) since 1988, confirming the observation from the chart of the month. The FED has never allowed interest rates to rise so sharply in such a short period of time.
How should one adjust one's investment policy to such special events? The answer is simple. You shouldn't. You have to set your investment policy for the long term and stick to it even in crises. If you adjust your investment policy after such extreme events, first of all you will be too late and secondly you will be right in 2% of market situations, but wrong in 98%.
That is why we have changed very little in the model portfolios this year, except to adjust the cash amount now and then.
To determine the long-term investment strategy, we stick to the following framework:

Source: Marmot

The concept can be used both in the long term, for an economic cycle that lasts 8-12 years, and in the shorter term, over 1-2 years.
In the long-term view, we are probably somewhere between worry and hope. Interest rates are likely to continue to rise for 1-2 years and have a strong impact on both bond and equity markets.
In the short term, over 1-2 years, we are currently somewhere between pessimism and resignation. This means that a major recovery is possible in the short term.

Source: Isabelnet, 07.10.2022

The chart shows the number of times the terms "corporate bankruptcy" and "recession" are mentioned in financial publications. A recession also means more corporate bankruptcies.  Normally, therefore, the mention of these two terms in publications goes hand in hand.
The discrepancy either means that recession fears are completely exaggerated or that we are facing an unprecedented wave of bankruptcies.

Source: Twitter, Jurrien Timmer, Fidelity, @TimmerFidelity, 06.10.2022

The chart shows the course of the S&P 500 in the 23 bear markets since 1900, namely 2.5 years before the peak and 6 years after the peak. The black line corresponds to the current course. Typically, 1-1.5 years after the peak, stabilization and recovery occurred in 17 cases and only in 6 cases things got worse.

In the next few weeks, the publication of the company results for the third quarter is due.

Source: Twitter, FactSet, @FactSet, 08.10.2022

The chart shows the expectations for the reporting of earnings results for all companies in the S&P 500 from the different sectors. In gray the expectations of last week in blue the expectations of the current week. The average expectation is for an 8.5% increase. Given the current recession fears, this is a considerable increase. At the same time as the results are published, companies usually also provide an outlook for the fourth quarter. These statements are weighed in the balance and can have a major impact on the share price in the current market environment.

Expectations are quite sporting, so there are likely to be a number of disappointments.

Source:Twitter, Jurrien Timmer, Fidelity, @TimmerFidelity, 06.10.2022

The chart shows the course of the earnings reports of the companies in the S&P 500 in the last 23 bear markets since 1900. At least as far as the company results are concerned, we are in the solid midfield in the current bear market. This makes a further sharp drop in stock market prices rather unlikely.

Source: Isabelnet, , 06.10.2022

The chart shows the price/earnings ratio expected in the next 12 months. The excessively high valuations of 2021 have already been strongly corrected. These are not yet bargain prices, but they are definitely fair valuations.

Debt in America at record level.

Source:Twitter, Wall Street Silver, @WallStreetSilv,  09.10.2022

Due to the current political turmoil, most investors are not paying attention to how much debt America has. Normally, this is a big issue in America in a mid-term election year. We expect this to become an issue again sooner or later and put pressure on the USD.
In Europe, government support packages are currently being put together to cushion the high energy prices. In the US, this could soon become an issue as well.
What unsettled the markets at the end of last week was the decision by OPEC+ to reduce oil production volumes in order to keep energy prices high. This can be interpreted as a clear stage win by Russia over the US.
U.S. President Biden released U.S. strategic oil reserves in recent weeks to depress oil prices and increase the chances for Democrats in the midterm elections. The polls then also turned in favour of the Democrats.

Source:Twitter, Wall Street Silver, @WallStreetSilv,, 09.10.2022

The graph shows the change in strategic oil reserves in the U.S. over the last 10 years. A 25% reduction over one year is unprecedented. Biden has maneuvered himself into an uncomfortable position here and OPEC or Russia has caught him on the wrong foot. One month before the mid-term elections, energy prices are likely to rise again in the U.S. as well.

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