Chart of the week
The chart shows the distribution of annual returns for stocks and bonds since 1930. Normally, these returns are normally distributed around a mean value. For bonds, this mean and thus the average return since 1930 is about 4%, for stocks it is about 11%.
Why this is important
2022 was an exceptional year in which both bond and equity returns were seen at the far left end of the normal distribution curve. Since 1930, after such a bad year, returns the next year have always been in positive territory. When stock markets overshoot into negative territory, there is always a countermovement to the mean. In theory, this is called "back to the mean."
Generally, this is a time when it pays to get into the markets.
Leather shoes are the toilet paper of the energy crisis
The chart shows a Bank of America survey of the largest institutional asset managers. They were asked whether they tend to take more or less risk than usual. Investors have never been more cautious or negative on the markets since the last 20 years.
Most are waiting on the sidelines, holding a lot of cash and waiting for better times. Typically, this is a good time to get back into the markets before the big investors do.
Many investors are worried about energy supply in Europe. Last week we showed that Germany, in particular, is already well on its way to saving gas. But what happens if companies in Germany have to cut back even more? Will the economy come to a total standstill?
The graphic shows a survey of companies in Germany on how they would have to react if they had to face restrictions in gas supply.
The negative first: leather shoes are the toilet paper of the energy crisis. So if you're afraid of the energy crisis, you'd have to buy leather shoes now, because that's where production would stop completely.
But now serious again. For the question above, the all-clear can be given. Even in the worst case, 10-25% of companies would have to cease operations in the energy crisis, depending on the industry, but there would be no total breakdown. The danger is overestimated. In the automotive sector, which is important for the labor market, 47% of firms could continue operations and 39% could produce at a reduced rate. In the food industry, 33% could continue producing normally and 39% would have to curtail operations; but only 27% would have to cease operations. Sure, there would be restrictions, but a lockdown like Covid's would not occur.
An energy shortage like the one feared is new and has never happened before. Investors tend to overestimate the risks. Energy stores are well stocked and if you analyze the data, you can give the all-clear.
But what is completely ignored are the risks for the winter 23/24. If the energy storages are completely taught in that winter, you will have too little gas in the summer to fill them up again. The real challenge will be the winter of 23/24.
This leads us to conclude that we are still holding on to companies involved in the energy transition; even if the return in 2022 was not good. This will probably be the only growth sector that can continue to grow with favorable credit.
Another, but quite different, argument that is positive is the election cycle in America.
The chart shows the average return of the individual election years in the USA (light blue). In dark blue, the return of the S&P 500 in the current election cycle. The period after the midterm elections in the middle of a president's term usually delivers the best return. This is due to the fact that usually during midterm elections, majorities in the House change and then compromises have to be negotiated. This usually benefits the economy.
USA and Europe in different inflation cycles
The chart shows the difference in headline inflation minus headline inflation (but minus the volatile data from the energy and food sectors). The U.S. already seems to have inflation under control, but Europe does not yet. It is now taking revenge for the fact that the ECB raised interest rates much later than the FED in the US.
At this point, we would like to point out once again that we are currently dealing with inflation that has been driven by the supply side (especially the supply bottlenecks caused by Covid). This is unusual. Inflation is usually triggered by the demand side. Central banks around the world have not taken this into account and have used the same means as for inflation triggered by the demand side.
The chart shows a model calculation of the inflation triggered by the supply and a possible forecast over one year. The figures fall so sharply that deflation may occur. The basis for the calculation was the following data:
The graph shows the usual data series that are looked at when analyzing the supply problems, which were mostly triggered by Covid. All data series show a massive decline.
There is therefore a latent risk of deflation in 2024.
Time for gold?
We have written in recent reports about the inverse yield curve and why it occurs. It is always a harbinger of a recession.
The chart shows the return of gold in the period following an inverted yield curve minus the return of the S&P 500 (i.e., the U.S. stock market). A rising curve means gold is yielding a better return than the stock market (blue line). Many investors compare the current inflation situation with the period of 1974 and 1975. In these years (orange line) the out-performance was particularly high.
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