Falling risk appetite lead to large shifts

Chart of the week

The chart shows weekly initial jobless claims in the United States. The figure describes how many people lose their jobs each week and file claims for unemployment benefits. Initial claims are a reliable indicator of the U.S. labor market. The data is published every week by the U.S. Department of Labor and they tend to have a big impact on market activity.

Why it matters:

Initial claims fell on Friday to their lowest level since 1969, 52 years ago! This is a clear indicator that the U.S. economy is recovering better than expected. The bad news, however, is that inflationary pressures could rise due to higher wages.

Good economic recovery brings rising interest rates

Although the Covid numbers are high, the U.S. economy is recovering strongly. More and more companies are struggling to find enough qualified employees.

The chart shows that the number of vacancies remains at a very high level. In order to hire enough employees, companies will be forced to increase wages. This can set off an inflationary spiral that is difficult to stop.

As a reminder, inflation has skyrocketed in recent months due to supply constraints and the base effect of the covid crisis. The central banks are trying to calm the markets and are taking every opportunity to say that inflation is only temporarily high because of special factors and will fall sharply again in 2022.

The chart shows the inflation expectations of the respected investment bank Morgan Stanley and it’s roughly in line with the expectations of the whole market. Inflation figures as of January are still expected to be high, but afterwards the inflation in the industrialized countries (DM) should fall back to 2%.

Low inflation would allow central banks to keep interest rates low. Contrary to the expectation of low inflation figures for 2022, there is still the expectation of most market participants for interest rate hikes.

The chart shows when most market participants expect a rate hike in the U.S., and how this expectation has changed in recent months. In September 2021, only about 5% expected a rate hike in June 2022, now it is 100%.

The U.S. Federal Reserve is currently reducing its support for the bond market, and thus its expansionary monetary policy, by USD 15 billion per month. This means that it will be discontinued altogether in June 2022. An increase in interest rates before this date seems illogical. It would be like a driver stepping on the gas pedal and the brake at the same time.

Risk appetite declines

The uncertainties described above; growing economy, high inflation and concerns about interest rate hikes have led to a sharp decline in investors' risk appetite in recent months.

The mainstream market indices such as the S&P 500 or the EURO STOXX 50 remain at high levels, but somewhat unnoticed by the press, large shifts are taking place. Investors are shifting money into solid large companies (mega caps). Most of the money is flowing into companies with proven business models and solid earnings.

The chart shows the return of the tech-heavy NASDAQ Index excluding its 5 largest stocks (Apple, Microsoft, Amazon, Tesla and Nvidia). Although the main index is up 20% for the year, the majority of technology stocks in the NASDAQ are returning -20%.

Goldman Sachs has calculated its own index for this purpose, which consists of technology stocks that have a high market capitalization but do not report a profit. These include well-known stocks such as Pinterest, Plug Power, Uber, Snap, Peloton and Spotify.

These stocks were the winners in 2020 with a return of almost 500%! However, in 2021 they are down over 30%. Although the main market indices have a strong return of 15-20% in 2020, most investors are likely to have had a much worse return.