US labor market and key interest rates, comeback of bonds, investors still too negative.
Chart of the week
The graph shows the state of the US labor market. The red line shows all job openings and the black line shows the number of unemployed. Currently, there are more job openings than unemployed people than at any time in the last 20 years.
Why this is important
The decisive factor for the stock market development in 2023 will be how long and how much the U.S. Federal Reserve will have to raise interest rates to get inflation under control and whether there is already room for interest rate cuts at the end of 2023.
The majority of this depends on the US labor market, which continues to deliver solid figures and where the gap between job vacancies and the unemployed is creating wage pressure. However, the labor market is lagging behind the already cooling economy.
The chart shows which interest rate hikes the market (shaded in light blue) and the renowned investment bank Goldman Sachs (shaded in dark blue) expect.
After the third-fastest and strongest rise in interest rates in the history of the stock market, the momentum of further rising interest rates in the U.S. should now ease noticeably.
The further normalization of supply chains, falling energy prices and the end of the zero-covid policy in China are having a lowering effect on inflation. However, inflationary pressure from rising wages could cancel out all these reductions. Investors should therefore pay very close attention to news on the labor market in the USA.
This week, the figures for the ISM Index in the USA were published. The Purchasing Managers Index (red line), also "ISM Manufacturing Index", is the most important and reliable leading indicator for economic activity in the US. It shows the activity of the purchasing managers of US companies. U.S. consumers are currently still shopping like crazy (blue line), but most companies expect less sales and are therefore cutting back production. Some companies like Amazon have already announced layoffs.
The big question for 2023 is now how much the slowdown of the US economy by the Federal Reserve will go. The effect of rate cuts is usually seen in the economy about 6 months after the increases. Has the Federal Reserve overdone it and a severe recession will now follow, or has it found the happy medium?
Most market participants expect only a mild recession. We don't expect a severe recession, but we think the market is a bit too optimistic here. We think that high inflation in particular will be with us for longer than most think.
We remain fully invested, but maintain a strong overweight in value stocks. In times of high inflation, value stocks should outperform growth stocks.
The chart shows the yield on bonds issued by the state and municipalities in the USA. Due to one of the fastest increases in interest rates, in the history of the stock market, the yield was correspondingly negative. Many investors have divested themselves of bonds.
Bond prices, suggest a very severe recession. We think that investors are too negative here.
In the case of high-yield European corporate bonds, the premiums over government bonds are so high that it can be deduced that it is expected that over 40% of all companies will not be able to pay their interest. This is known as the default rate. In the 2007 financial market crisis, the effective default rate was only 9%. For us, this is an indication to take a closer look at bonds again.
The chart shows the money flows in bonds in the USA. Last year, there were almost only outflows. No one wanted to hold more bonds. In December 2022, there were inflows into bonds again after a long time. We think these inflows will continue.
Investors still too negative
The chart shows the result of a survey by AAII (American Association of Retail Investors). For over 40 weeks straight, there have been more pessimists than optimists. This is the highest level in over 30 years. If you analyze the economic numbers, this pessimism is not understandable.
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