Chart of the week

Source: Isabel.net, 12.02.2022

The chart shows how much money has been pulled out of U.S. equity markets by investors in recent weeks. The withdrawals are at a new low since January 2017.


Why this matters


The chart points out how pessimistic many investors are. But it also shows that all the investors who wanted to sell have now sold. Historically, buying has occurred again at such times, with a corresponding upward counter-reaction in the stock market.

Source: Isabel.net, 02/12/2022

The AAII Sentiment Index (American Association of Individual Investors) shows a very similar picture. Selling has been clearly above average and at this low level investor sentiment has mostly turned around.


Those who have not yet sold should not do so now. Those with cash in their portfolios should consider getting in now.

Mixed earnings reports and fear of Ukraine crisis

Source: Youtube Markus Koch Wall Street from 05.02.2022, time stamp: 5.06

The chart shows the return of individual sectors of the S&P 500 compared to the overall index. Since the beginning of the year, the favorite role in the stock markets has completely changed. All sectors that were favorites last year have lost more than the broad benchmark. Such a January effect is not unusual on the stock markets.


Many investors paid little attention to the current earnings season. Fears of a worsening of the crisis in Ukraine are running rampant. The U.S. President Biden has clearly stated that the U.S. would not go to war over Ukraine. Moreover, Ukraine is insignificant in terms of economic policy. So why is the stock market reacting so negatively to the crisis?


If Russia invades Ukraine, tough sanctions will be imposed on Russia and they will likely be cut off from SWIFT international payments. This would lead to a shortage of oil and gas. Prices have also already risen sharply. This would further fuel inflation throughout Europe and also in the USA.
Russia has been very clever in foreign policy so far and has usually exploited weaknesses in the U.S. or Europe to position itself better. We consider an invasion now, when everyone is looking, to be untypical and unlikely. Moreover, he would come under domestic political pressure if he invaded such an insignificant country as Ukraine. It was different with Crimea. There lies Sevastopol and the only warm water port of the Russian Navy.


Currently, bitcoin is reacting very strongly to the Ukraine crisis. This is due to the fact that after the ban on bitcoin in China, a lot of miners have moved their activities to Russia. If there are severe sanctions against Russia, miners would not be able to transfer their Bitcoins away from Russia.  


Stock Splits


Google announced a 20:1 stock split this week. On July 15, 2022, Google's stock price will be reduced by 20 times and each investor will receive 19 additional shares. The issue had been somewhat forgotten in recent years.

Source: Isabel.net, 12.02.2022

The chart shows how much stock splits have decreased in recent years.


The Google share currently has a value of USD 2,865. Especially for small investors who want to build a diversified portfolio with 15 to 20 stocks, this is problematic. If they do not want to hold more than 5% in Google, they have to invest a total of USD 57'000. If the stock price now drops to USD 143, they can build a diversified portfolio with as little as USD 2,850.

A stock split therefore usually boosts demand for the stock. This is historically proven:

Source: Isabel.net, 12.02.2022

The chart shows the return of a stock in the months following the split. Usually these stocks show a much better return than the overall market. If you want to follow the topic further you can see which stocks are doing a split here, on the NASDAQ stock split calendar

Big moves in the bond market

Source: Youtube Markus Koch Wall Street from Feb. 10, 2022, time stamp: 4.26

The chart shows that the majority of investors now expect 9! Interest rate hikes expected. That is an all-time high. We also expect higher interest rates, but we consider 9 rate hikes to be overly pessimistic.

Source: Isabel.net, 12.02.2022

When interest rates rise, you will make a loss on bonds. Therefore, it is only understandable that many investors are selling corporate bonds. Selling has reached levels rarely seen before. We also consider this reaction to be exaggerated, and there should be a countermovement in the short term. For long-term investors, however, bonds are still an investment that we do not recommend at present.


What does not currently fit in with the big sell-off in bonds are the money flows from TIPS (Treasury Inflation Protected Securities):

Source: Youtube Markus Koch Wall Street from 10.02.2022, time stamp: 2.35

The chart shows that investors have been selling TIPS since mid-December. TIPS are inflation-protected government bonds. Most investors therefore assume that inflation will not rise further. But then why 9 rate hikes are still expected by mid-2023 is not consistent.


Currently, we also see a strong flattening of the yield curve. That is, the difference between short-term and long-term interest rates is decreasing.

Source: Ycharts, 02/13/2022


The chart shows the difference between the 2-year and 10-year U.S. Treasury bonds. A rising curve means a steeper yield curve and a falling curve means a flatter yield curve. Currently this is not scary, BUT if the curve turns negative it would be an extremely negative sign. So far, this has been the most reliable indicator of a recession. In all cases where the curve turned negative and a so-called inverse yield curve occurred, the economy slid into recession 6-12 months later.

Want to join next event?

Disclaimer

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.

Want to make your money work for you?