Stock market sentiment worsens US technology sector.
Chart of the week
The chart shows inflation in the U.S. from 1966 to 1982 (blue) and inflation from 2013 to the present (orange).
Why this is important
The period around 1970 is considered most comparable to what is happening today and in recent years. In 1973, after a prolonged period of low inflation, there was a very sharp increase, which the central bank fought with sharply rising key interest rates.
The similarity of the inflation trend so far is striking. If things continue in the same script, inflation will continue to fall for about 1 more year, but then rise sharply again for almost 4 years. In the 1970s, the reason for the sharp rise in inflation was the high price of oil and the central banks' policy of massively increasing the money supply to finance the large government deficits.
Hopefully, central banks have learned from history and will not make the same mistake again. One concern, however, remains the price of oil. Because of the energy transition, very little is now being invested in the discovery and expansion of new oil wells. At the same time, oil consumption is expected to reach an all-time high in 2023.
Anyone currently taking out a mortgage should take out as long-term a fixed-rate mortgage as possible to be on the safe side.
Stock market sentiment deteriorates
In the past three weeks, the mood on the stock exchanges has deteriorated. The main stock markets then also went down 5-7%. This for the following reasons:
- China, the world's second-largest economy, is not getting off the ground. There has been no Covid recovery, and now the real estate crisis is boiling up again. Evergrande has filed for creditor protection in the U.S. and the No. 2 industry in China (Country Garden ) has stopped interest payments on loans.
- The economy in the U.S. is not cooling down and interest rates could rise even more
- To this as a contradiction, well-known voices like Michael Burry do not stop warning of a crash and a great recession.
The chart shows which interest rate decisions investors expect the Federal Reserve to make in the next 11 meetings. The range with the highest probability is marked in blue. Just a week ago, interest rates were expected to remain stable at the current level until May 2024. Now, a razor-thin majority expects another rate hike in November. Interest rates then also rose further, causing losses for bond investors.
The chart shows a Bank of America survey of the largest institutional money investors. The question was whether and when they expect a recession. Since July, expectations have shifted sharply. Many now expect no recession in Q4 2023. The number of investors who expect no recession at all has increased very sharply.
The chart shows the interest rate of the 10-year U.S. Treasury bond (black), the key interest rates of the Federal Reserve (yellow), the yield curve (SOFR) calculated by the futures prices, and the expectations of the voting members of the Federal Reserve (purple dots).
There is a saying in the stock markets: "Neverver fight the FED", Never stand against the central banks. Based on this stock market rule, we focus our analysis on the voting members of the Federal Reserve. They are the best informed players and they also make the important decisions. So interest rates could still rise a bit, but then fall more than most expect. So the 10-year Treasury bond yield should be close to its highs for the next 3-4 years.
We don't believe in the New World, with no recession and inflation coming back down to 1-2%.
We are convinced that the long-term cycle model in the chart above will prove true this time as well.
Indeed, the recession expected by many has not materialized so far. But if you look a little behind the economic figures, this looks different.
The number of unemployed has not increased much in the USA so far. This is listed as the most common argument that there is no threat of recession. The chart above shows in how many states in the USA unemployment is increasing (black). The blue line shows the trend in the weeks before a recession begins and in the weeks after (blue line). In some US states, the tide has already turned, and this should soon be evident in the overall figure.
The chart shows the increase in consumer loans at US banks. Since the end of the COVID crisis, these have increased by almost 25%. This is an indication that the majority of the current high consumption is taking place via higher borrowing and not because consumers are doing better. At the current high interest rates, consumption on credit cannot continue for long.
The chart shows 20 different valuation measures of the US stock market. We focus on the Schiller P/E, which is calculated according to the theory of Nobel Prize winner Robert Schiller. The current value is 30.8, which is 77% above the long-term average of 17.4. The maximum value since 1881 was 44.2, which was reached during the tech bubble in 2000.
The same picture is seen for all valuation measures. They are still far from the highs, but all valuation measures are far above the long-term average and indicate an overvaluation of stocks.
A good indicator of an emerging recession is usually the development in the real estate market. The chart shows the number of sales of existing homes. Sales have declined massively since the beginning of the year. Since 1968, this has always been a reliable sign that a recession is looming.
The chart shows how much the U.S. real estate market has changed due to higher interest rates. The monthly cost of buying a home today is nearly 50% higher than renting the same amount of living space.
This correlation is likely to lead to further slumping home purchases. The U.S. is several months ahead of Europe in terms of interest rate development. If interest rates continue to rise in Europe as well, there is a threat of a slump in the real estate market here as well.
US technology sector
All investors are talking about the US technology market. Everyone still wants to profit from the price increases.
The chart shows the USA as a model of success. Since 2010, the US stock market has had a significantly better return than the rest of the world. This is largely due to the development of the technology sector. Companies like Apple, Google, Amazon, Netflix and Tesla have changed all our lives for good. But can this go on forever?
Artificial intelligence could usher in the next upward phase. Many US companies are profiting from it. But if you look at the number of new patents in the field, China, not the U.S., is leading the way. Of the 10 companies with the most AI patents, only just two are from the US (IBM and Microsoft).
The chart shows the weekly inflows into the US technology sector. These are still positive, but the highs seem to have been reached.
The chart shows the weighting of the largest 7 technology stocks in the US equity index. Almost 30% is accounted for by these seven stocks only. This makes the actually broad stock index S&P 500 very dependent on these seven stocks. Upwards, as well as downwards.
Fast-growing companies, including technology stocks, need cheap credit in order to grow quickly. Since 2010, the correlation between a loose monetary policy (and lower interest rates) of the three largest central banks (USA, Europe and Japan) and the technology index (NASDAQ 100) has therefore been clearly evident.
The rally of the technology stocks in the year is completely out of the ordinary. That is why many long-term investors are critical of the latest movement, which is almost exclusively justified by the topic of artificial intelligence.
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