Market report

Volatile Time for Investors, U.S. vs. Europe: Is a Trend Reversal Imminent?

December 12, 2022
Volatile Time for Investors, U.S. vs. Europe: Is a Trend Reversal Imminent?

Chart of the week

Source: YouTube, Markus Koch Wall Street, 6.12.2022, Time Stamp: 06.38

The chart shows the number of days in the past 252 days (1 year) where the daily change on the stock markets was higher than 1.5%. 95% of all daily returns are between +1% and -1%. A daily change above 1.5% is far above the average.
The current value of this indicator is the third highest since 1950. Only after the bursting of the dotcom bubble in 2000 and during the financial crisis were the values higher.

Why it is important

In volatile market phases it is essential to have a clear investment plan and a long-term investment strategy and to stick to it. High daily changes should not be allowed to throw you off your game. This is the only way to achieve a good return in the long term.

A year of records

2022 was a remarkable year. Many statistics show values that have never existed before. But we also almost never had to contend with a global pandemic as long as negative interest rates and, on top of that, a war that caused energy prices to rise massively. Here is a selection of some of the record values:

Source: Twitter: James Choi, @JC_Investment, 08.12.2022

The chart shows the number of outstanding put options on the CBOE exchange. The CBOE is one of the largest futures exchanges in the USA. Put options are used to hedge a portfolio. It works like insurance. There have never been so many investors hedging their portfolios against falling prices since 1996.

The article in which the chart was published is titled: "Even Your Uber Driver Is Currently Invested in Put Options."
In the past, such high values of outstanding put options usually led to an upward trend reversal.

Source: Twitter: Charlie Bilello, @charliebilello, 10.12.2022

The chart shows a survey of consumer confidence conducted by the University of Michigan since 1950. Here, too, we see the lowest value since the indicator was collected. Never before have consumers been so negative. This is leading to a sharp drop in consumption and large long-term investments are being postponed. The value suggests a near recession.

Source: Isabelnet, 10.12.2022

Investors who are afraid of losses usually invest in bonds. U.S. government bonds are among the safest investments worldwide. In that year, however, investors suffered the highest loss in U.S. government bonds since 1920.

The chart shows the spread (or the additional yield) that one gets for companies with a poor credit rating in Europe, compared to government bonds (dark blue line).
Based on the current level of the iTraxx crossover of 655 basis points, the market assumes a cumulative default rate of 44 percent over the next five years. This is an unprecedented level; even during the Great Financial Crisis, defaults only peaked at just over nine percent and then declined over the following three years.
Our conclusion from the charts:
Investors are currently assuming a horror scenario. In the financial markets, they say "extremely negative scenarios are factored into prices." We do not believe that these horror scenarios will materialize and are expecting positive surprises, which could boost prices in 2023.

USA vs. Europe

When the war in Ukraine began, there were many voices predicting that European stocks would now perform far worse than those in the USA. In the first two weeks after the start of the war, this was also the case.
From then on, however, prices largely ran in parallel and have been able to regain ground in recent weeks.

Source: Twitter: Bespoke, @bespokeinvest, 09.12.2022

Since the start of the war in Ukraine, European stocks have outperformed those in the US. In the long term, however, things look different.

Source: Isabelnet, 10.12.2022

The chart shows the out-performance of equities in the US versus the rest of the world (RoW). Since 2010, we have seen the largest out-performance of US equities since 1950. However, there are increasing signs that the trend may soon reverse. Technology stocks in particular, but also companies such as Amazon and Tesla, are in major correction phases and in some cases are having to make massive staff redundancies against the trend in the general economy.

Source: Twitter: Reformed Trader, @Reformed_Trader, 09.12.2022

The chart shows the price development of the S&P 500 since December 2021. The stock market has been in a downward trend since then. Prices have already bounced off the falling trend line three times. The next few weeks will be critical in determining whether we stay in the downtrend for 2023 or whether 2023 will turn around and break the downtrend to the upside.
Based on our analysis and the indicators that we have compiled above, we think the probability is higher that the Kruse break out against the top and it comes to a trend reversal, rather than a persistence in the downward trend.

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The content in the blogs is solely for general information and to help potential clients get an idea of how we work. They are not recommendations that should lead to the purchase or sale of assets and are not investment advice. Marmot.Finance cannot judge whether and how the statements made fit your investment objectives and risk profile. If you make investment decisions based on this blog entry, you do so entirely at your own risk and responsibility. Marmot.Finance cannot be held responsible for any losses you may incur as a result of information contained in this blog entry.The products mentioned are not recommendations, but are intended to show how Marmot.Finance works and selects such products. Marmot.Finance is also completely independent and does not earn money in any form from product providers.

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