Market report

Will early risers be rewarded? Stock market valuation. What's next for interest rates in the U.S.? Economic development and real estate prices in Europe and Switzerland.

June 26, 2023
5 min.
Will early risers be rewarded? Stock market valuation. What's next for interest rates in the U.S.? Economic development and real estate prices in Europe and Switzerland.

Chart of the week

Source: Twitter, Bespoke, @bespokeinvest, 21.06.2023

The chart shows the different return during the day from the S&P 500 since January 2022. The blue line shows the return if one had always been invested only in the first half hour when the market opens. The gray line shows the return if you had always been invested in the market from 10am to 3pm.
Why this is important
The chart is important for the buyer of individual stocks or the day trader. It provides information on when in the course of the day it is best to buy stocks. There is a stock market saying that "dumb money" trades at the opening time, while "smart money" trades at the closing time.

The chart clearly shows that it is very unwise to buy in the first 30 minutes. This is due to the fact that many retail investors enter trades into the systems before the market opens. These are then executed in the first few minutes when the market opens. This often leads to irrational movements. As the chart shows, you get a much better return if you buy in the middle of the day (gray line) or in the last hour. So early risers are not rewarded.

Valuation of the stock market

Source: Isabelnet, 22.06.2023

The chart shows the valuation of the companies in the S&P 500 Index. It is important here to look at the column marked in blue. The first line shows that the total market capitalization of all stocks in the index is 232% of the gross national product of the USA. Now is that high or low? It is very high indeed. Only in 3% of all monthly measurements since 1974 has the value been higher. That is, only in 18 months out of a total of 594 months, has the value been higher.
One of the most widely followed values for stock valuation is the Forward P/E. What it is exactly, you can read here, on our homepage. Here, since 1974, only in 12% of all measurements the value was higher.

Almost all values in the table show that the stock market has a very high valuation. And this at a time when the majority of market participants expect a recession. A correction is brewing here.

Source: Isabelnet, 20.06.2023

The chart shows data from a Bank of America survey of the largest institutional asset managers. The blue bars indicate whether investors are overweight or underweight US equities. Currently, they are the most underweight they have been since 2005. The blue line shows whether U.S. equities have a better return (value above zero) or a worse return (value below zero) than global equities (ex U.S.).

So far, such cases have always resulted in an underperformance of U.S. equities.

Source: Twitter: AndreasStenoLarsen, @AndreasSteno, 16.06.2023

The chart is from the same Bank of America survey and shows how the large institutional managers are invested. They are particularly overweight in bonds and underweight in equities. Among equity sectors, they are heavily underweight in REITs (real estate), energy and banks, but overweight in utilities and healthcare.

What's next for interest rates in the U.S.?
As explained in last week's market report, market participants expect one more rate hike in the U.S., then there shouldn't be one for a while. What has that looked like in the past?

Source: Twitter, Bespoke, @bespokeinvest, 23.06.2023

The chart shows the development of key interest rates in the U.S.A. since 1993. Particularly highlighted is the period during which interest rates move sideways after a major increase. As a rule, this is 5-7 months. Once, however, it can be 15 months. So the four months currently expected is slightly below the historical average.
But also crucial for bond investors is when the inverse yield curve normalizes. Normally, long-term interest rates are higher than short-term interest rates. This is because the longer one looks into the future, the more uncertain the forecast becomes. Currently, the structure is exactly the opposite. Short-term interest rates are higher than long-term interest rates. Since a recession is just around the corner, short-term interest rates are currently higher. Such an inverse yield curve usually does not last long.

Source: Twitter, Bespoke, @bespokeinvest, 22.06.2023

The chart shows the number of weeks in which the yield curve was inverted in the past. At 154 weeks, this is the fourth highest value since 1960, so a normalization of the yield curve could happen in the near future.

Source: Twitter, Otavio (Tavi) Costa, @TaviCosta, 23.06.2023

The chart shows the percentage of total bonds in the U.S. that have an inverted yield curve. Here, too, it is evident that a reversal could soon take place.
In the past, when the inverted yield curve breaks down, it usually happened with short-term rates falling very sharply and long-term rates falling weakly. Most investors conclude that to profit from this, one would now have to invest in short-term bonds. But that is not the case. Short-term bonds hardly react at all to interest rates due to their short maturity and thus low sensitivity. The biggest price gains are therefore to be expected in long-term bonds.

Economic development and real estate prices in Europe and Switzerland
The interest rate and economic development in the USA usually has a lead of 6-12 months over the development in Europe.

Source: Twitter, Andreas Svendsen, @SvendsenAndres, 23.06.2023

The chart shows how much the European Central Bank ECB has reduced the money supply in recent months (light blue line). Normally, this slows down economic activity, which is shown here with the purchasing managers' index (PMI, dark blue line). This economic slowdown has not yet happened, but as the chart shows, it is now very likely to happen.

Source: Twitter: Holger Zschaepitz, @Schuldensuehner, 23.06.2023

The chart shows how real estate prices have reacted to interest rate increases so far. After a long period of price increases, investors now have alternatives in bonds again and real estate prices are falling.
During the week, the Swiss central bank published its new Financial Stability Report. In it, it again warns of problems in the real estate sector. It expects that 20% of real estate owners will have problems paying their interest if the key interest rate rises above 3%. This is currently not yet the case (we are at 1.75%), but probably soon.
The SNB writes in the current report: "With the rise in mortgage rates, the probability of a decline in residential property prices has increased. Many properties are valued too high, there could be price corrections between 15% and 40% - downward.

It is always advisable for investors not to ignore the warnings of the central banks.

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