Market report

The jug goes to the well until it breaks.

March 25, 2024
5 min.
The jug goes to the well until it breaks.

Chart of the week

Source: X, Bespoke, @bespokeinvest, 23.03.2024

The chart shows the number of days in which the S&P 500 has risen without a correction of at least 2%. We are now looking at the fourth highest level in 74 years.

A pause in the rally would therefore be nothing but normal.
Why this is important
The stock market does not move in a straight line up or down. There are always exaggerations. At the moment, investors seem to be very positive.

Source: X, Jeffrey A. Hirsch, @AlmanacTrader, 22.03.2024

The charts shows the average return of the S&P 500 if an Incumbent US president stands for re-election (black, blue (ex Covid). The average return for all years is shown in red. A constellation such as the one we are currently seeing in the US election campaign has led to above-average returns in the past. The current annual return is shown in green. We are therefore currently well above the usual trend.
The following chart provides one reason for this very good performance:

Source: YouTube, Markus Koch Wall Street, 11.03.2024, Zeitstempel 08.16

The chart shows the price development of the S&P 500 (black, left-hand scale) and the expected key interest rate level until the end of 2024 (blue, right-hand inverse scale). From November 2023 to February 2024, the stock market was driven by hopes of falling interest rates. Up to six interest rate cuts were expected. But then these hopes evaporated. What drove the stock market up further, however, were the good company results and economic growth. There is still no sign of a recession.

Source: X, SentimenTrader, @sentimentrader, 22.03.2024

The chart shows the risk premium of the S&P 500 (purple line). The market risk premium reflects the additional return demanded by investors over and above the risk-free interest rate. This is currently lower than for US corporate bonds (black line). This means that the risk/return ratio for corporate bonds is currently better than for equities.
Inverse yield curve
Long-term interest rates are normally higher than short-term interest rates. This is because there are more risks in the long term and an investor wants to be compensated for them. Rarely is the exact opposite the case. The inverted yield curve. As many investors still assume that there could be a recession, short-term interest rates are higher than long-term rates.

Source: X, Michael A. Arouet, @MichaelAArouet, 21.03.2024

The chart shows how many days an inverted yield curve lasts. We are currently seeing the longest period of an inverted yield curve since 1950. However, the yield curve has already normalized somewhat, but is still inverted. In the past, every time the inverted yield curve has resolved, there has been a recession and higher unemployment.

Source: X, Game of Trades, @GameofTrades_, 22.03.2024

The graph shows exactly the correlation described above. Since 1988, there has always been an increase in the unemployment rate and a recession when the inverse interest rate situation has been resolved (period marked in red on the black line).
For a trend reversal to occur, there always needs to be a trigger. New information that forces investors to rethink. And it is precisely this trigger that is currently missing.

One such trigger could have been the reporting of NVIDIA's earnings figures. This would have led to a collapse in artificial intelligence stocks. But NVIDIA was able to surprise all investors once again in a positive way.

Another trigger could have been last week's press conference by the US Federal Reserve. However, the Fed has further fueled hopes of three more interest rate cuts this year.

Source: Isabelnet, 20.03.2024

The chart shows a Bank of America survey of the largest institutional investors. They were asked where they see the greatest risks. Most investors are afraid of inflation, which is on the rise again.
Information that will force investors to rethink is very likely to come from the side where investors are most worried. High inflation and/or an escalation in the geopolitical environment.
As long as this does not happen, the saying goes: the jug goes to the well until it breaks.

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