Market breadth drops dramatically, banking crisis in America the background, recession inevitable.
Chart of the week
The chart shows inflation in the euro area (blue) and inflation in Spain (black). The Eurozone CPI Flash, is an estimate of the inflation figure that is announced two weeks later, but is usually very close to the real inflation.
Why it matters
Inflation in Europe continued to fall in March. It is important for consumers to know whether lower inflation numbers are likely to continue in the future. The European central bank's interest rate recovery activities are also based on this.
Since 2006, inflation in Spain has had a very high correlation with inflation in the euro area two months later. Based on these figures, one can be more relaxed about the future.
Market breadth falls dramatically
The first quarter of 2023 is over. The chart shows the return of the individual sectors in the US. Based on these numbers, there was a rally in tech stocks due to the easing on the interest rate front. After all, some had lost as much as 70% in value before that. Should you still invest in tech stocks now?
In the stock market, there is a concept of market breadth. If the S&P 500 goes up and all the stocks in the index go up, that would be the maximum possible market breadth. Since all stocks are supporting the uptrend, one can assume a longer lasting trend. Currently, however, this is not the case.
The chart shows how much market capitalization the 15 largest stocks in the S&P 500 Index have delivered (red). In blue you can see how much market capitalization the other 485 stocks have delivered. You can say that the whole increase of the S&P 500 this year is due to only 15 stocks.
The chart shows the same correlation, but you narrow it down even more. The all-knowing stocks Meta (Facebook), Amazon, Apple, Microsoft and Google have gained 19% since December, while all other 495 stocks in the S&P 500 have failed to deliver a return.
Such narrow market breadth is rare and is usually the harbinger of falling markets.
Banking Crisis in America - The Background
In the USA, banks have the option of reclassifying assets on the balance sheet from "normal" assets (gray line) to assets they intend to hold to maturity (red line). Normal assets must be carried at current market cost, while assets held to maturity can be carried at nominal value.
The chart shows 15 banks and the extent to which they have made use of the reclassification option by December 31, 2022. Especially in times of rising interest rates, this is a welcome opportunity for banks to hide book losses.
At the top right of the chart, you can see the figures for Silicon Valley Bank, which was the first to go bankrupt. Here the ratio between normal assets and assets held to maturity was about 1:5. For almost all banks, including the big banks JP Morgan or Wells Fargo, the assets they want to hold to maturity are larger than the normal assets. This then also shows how important and correct the rule of the FED was to intervene here.
The chart shows the total of all assets that banks intend to hold to maturity. The figures are 3 months old. This week, companies in America begin to release their first quarter earnings numbers. The banks will be the first to disclose the numbers. Here we are eager to see how the accounting for the assets has changed.
The chart shows how customers' bank deposits at the big banks (black) and at the smaller banks (red) have changed in recent weeks. In the week of the greatest panic, very many customers shifted their funds from small banks to the big banks. Now, however, the big banks are also losing customer funds. The majority of these funds are flowing into money market funds or short-term government bonds.
The chart shows the probability of a recession, derived from the current yield curve. The probability is currently 63%. Since 1960, there has always been a recession after the figure was this high.
At the moment, however, market participants are assuming that corporate profits will continue to rise. This is a discrepancy that worries us. There has to be an adjustment of expectations here.
But there is also light at the end of the tunnel:
The chart shows an index derived from three surveys of the largest global asset managers. They were asked about growth expectations and their allocation to cash and equities. The index shows that the largest global asset managers have almost never invested so conservatively. Almost always, when investors had invested so little in equities and the cash allocation was so high, markets went up. In such market phases, it takes very little positive news for markets to rise. Then, because everyone is afraid of missing the rally, there is a broad rise.
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