Where are the stock markets headed?

Chip industry illustrates the classic from shortages to glut -cycle.

No wonder that semiconductor stocks have lost ~40 % of their value this year.

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SBAB estimates Swedish housing market has slumped 17 %.

Households expect more gloom in the future:

The majority of strategists and investors wait for more trouble this year. Stock bottoming later this year amid recession seems to be the concencus.

But if we look at the economic data in the largest economies its hard to be that bearish.

For example, China is going to pick up later this year. Subway data is already improving in some cities, indicating more economic activity.

Germanys economy, Europes largest, is in reasonably good condition. Despite the energy crisis, unemployment is still low (5,5 %). This chart is interesting. The hit to gas intensive sectors is somewhat compensated by the revival of chip intensive sectors.

Rising interest rates are seen as negative for indebted households, especially in the Nordics. But in most of Europe people don’t have much mortage and many own their house outright. Rising interest rates actually support income, because many Europeans have huge savings.

In the largest economy of the world, the cycle we saw was not that hot in terms of investments. So it is reasonable to assume that the recession wont be as severe as many investors anticipate. There is no boom bust cycle to recover from.

I wrote about these issues in the latest post.

One thing is certain: there is no escape from macro-related topics this year! 2023: Making Macro Hot Again ;)! :boom:

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Few graphs from the latest post.

European stocks and especially cyclicals have outperformed recently despite the so-called “recession”. Here I juxtaposed ISM Manufacturing index and euroarea cyclicals stock index. These have seen a strong diversion recently. Investors are waiting short recession, or China opening makes them happy?

Economic surprises continue with positive note.

Earnings season is beginning! SP500 earnings “growth” is expected to be -4,1 %. Analyst estimates have crashed recently.

We can not talk about actual earnings recession though. Earnings should continue growth H2’23 per concensus:

This might seem too rosy questimate, because especially previous recessions destroyed earnings:

But, somethings are different this time. For example, households balance sheets are strong. They have plenty of cash. That was not the case in 2008 nor in 2000. Strong household spending supports the economy, and strong banks can quarantee that lending continues when needed.

More worrisome long term question is the profitability level of SP500. Can this last? I think mean reversion is probable, superb profitability has structural support from globalization, digtilization, winners takes all effect etc. So, don’t expect profitability to mean revert quickly. But I wonder has competion really disappeared?

Debt ceiling battle lurks around the corner. Yesterday, US hit it’s so called debt ceiling which means it can’t borrow anymore. Since federal goverment runs deficits, this means they will run out of money at some point. According to Bloomberg estimates, treasury runs out of cash around October.

I wrote more about the debt limits effect on market here, but I can summarize that usually it is a non event, but if debt battle escaletes we might see bumpy ride in the market.

Good thread how the bond market is expecting disinflation, not recession.

The biggest asset class in the world – housing and real estate – continues it’s meltdown in the face of rising interest rates and liquidity that is drying up.

The phenomenom is global, but for example in Sweden housing prices have slumped 15 % and Riksbank is forecasting 20 % decrease from the top. Some landlords are already forced to sell properties to cover their debt.

In Europe there is 390 billion euros of maturing debt this year. Of all the junk bonds, the real estate sector has the highest propability of default.

In the US we are now seeing a housing glut, indicating housing recession.

Only time will tell how this meltdown of the worlds largest asset class affects the economy and financial system.

Read more Real estate and housing investors in trouble

Short note. Generally speaking, buying shares at full employment hasn’t been the best idea, but this time it may be different.

I wrote about “hugger mugger market”: how even good news might not be good for stocks, because they indicate stricter monetary policy for longer.