Seasonality argues for a strong stock market month
Chart of the week
The chart shows the seasonality of the returns of the S&P 500. The bars represent the average monthly return since 1928.
Why it matters
Investors like to look to data from the past as a guide to the future. April is the second best stock market month of the year in this regard. One should be particularly cautious in February, May and September. The stock market adage "Sell in May and go away, but don't forget to come back in October" is also based on these correlations. If you are invested in the stock markets from October to April but not from May to September, you have historically had a much better return than if you were always invested.
But beware, these are averages. The biggest upward moves after the financial crisis or after the Covid crash were May through April.
Impact of interest rates on currencies
The level of interest rates in a country has a very high impact on capital flows. Capital flows to the countries with the highest interest rates in each case. This is especially true among developed countries with similar risk, such as the U.S. and Europe. Therefore, it is currently not surprising that the USD is gaining against the EURO.
The chart shows how the USD behaved in the last 10 interest rate hike cycles of the U.S. Federal Reserve. The "0" on the x-axis shows the date of the rate hike and the 52 weeks before and after.
The first rate hike of the current cycle was on March 15, 2022. Based on the chart above, the USD could now continue to rise until mid-September.
The chart indicates the estimate of the EUR/USD exchange rate by the investment bank Goldman Sachs. They also expect a weaker USD and thus stronger EUR from the fall.
The decisive factor will be when the European central bank also begins to raise key interest rates. Only then will the EURO have a chance to strengthen against the USD.
Investments in Asia
An exciting question is what connection rising interest rates in the USA will have on the economies in Asia. Many countries in Asia are strongly tied to the USD and their main export market is also the US.
The chart shows the performance of the stock markets in Asia (ex Japan) over the last 5 rate hike cycles since 1994. After the first rate hike, the markets were still able to gain, but as soon as the US economy slows down due to the rate hikes, the stock markets in Asia suffer more than those in the US.
As soon as the U.S. economy slows, you should also sell stocks in Asia.
Earnings season starts next week
Next week, companies around the world will begin publishing their first quarter 2022 business results. These figures will provide important impetus for the further development of stock markets.
Traditionally, the first sector to publish figures is the banking sector.
The chart points out that the banking sector is currently behaving very unusually. Normally, the yield of the U.S. banking sector runs amazingly parallel to the performance of the 10-year government bonds. For several weeks, this has not been the case. The last time there was such a strong divergence or opposite reaction in rates was 2018. Rates have risen very sharply in recent weeks and a counter-reaction is likely, but with 8 rate hikes still planned between now and mid-2023, rates are unlikely to fall much now. This would actually argue for a strong return for banks in the coming weeks. The announcement of the business results for the first quarter of 2022 could be the trigger for this.
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Federal reserve strategy, inflation expectations in the U.S. and Europe, investor behavior in the U.S. Where are we in the financial market cycle?
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