Weekly Market Report 36

Chart of the week

The Statistical Office of the European Union, or Eurostat, published this week the values of a regular survey of manufacturing companies in Europe. Nearly 40% of the companies surveyed said they were experiencing production problems because key components or raw materials were not available. This figure is well above the average of around 10% over the last 25 years.

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Why is this important?

‍When components or raw materials are in short supply, prices rise and rising prices mean inflation. The chart suggests that we will see higher inflation in the coming months. This in turn is negative for bond markets because it leads to rising interest rates. And it's negative for stocks, because companies can sell fewer products and/or their margins decline, making less profit.

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There was a lot of bad news to deal with this week:

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• The biggest 6 banks on Wall Street (Goldman Sachs, Bank of America, Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley) sent out a "Red Alert Warning" to clients this week. They all expect stock prices in the US to be lower by 10-20% in September.
  

• Several large brokers such as Goldman Sachs are reducing earnings estimates at many US companies.
  

• In addition to the US Federal Reserve, the European and Chinese central banks are now signaling that they are considering reducing ultra-loose monetary policy.

• US President Biden's USD 3.5bn economic and infrastructure package is wobbling in the House. Biden has not yet gathered the necessary votes.
  

• Widening manufacturing bottlenecks are slowing growth in Europe.
  

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September is the worst stock market month in history, or is it?

According to research by Fundstrat, September is the worst stock market month of the year since 1928. BUT in all cases where the stock market has risen over 13% by mid-year (as is the case this year), September has been a good stock market month.

It is amazing that after a warning of a 10-20% correction in the U.S. stock market from the 6 largest brokers in the U.S., the market has lost "only" 1% in value this week. The sales of the clients of these banks have been absorbed. There are still enough buyers who are willing to enter at the prices.

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Contrarian or swarm investing?

The stock market is actually simple to understand. If more people buy shares than sell it rises, if more sell than buy it sinks. If now all investors are positive and also in the boulevard newspapers it is written, one should invest now, who should buy then still? Everyone has already invested. A turnaround is then imminent. If, on the other hand, everyone is negative and has sold their shares, who should still sell? It only takes a few buyers and the market turns upwards.

Contrarian investing, i.e. investing exactly against the general market opinion, can therefore be worthwhile. In the current case, the largest 6 US brokers have sold all their speculative positions and all their clients as well. If the stock market in the US rallies only slightly by 2-5%, all these investors will come back in droves, afraid to miss the Christmas rally.

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307 days since the last correction over 5% in the US

This is currently the main argument of most stock market strategists warning of a correction in the stock market. 

The bears (investors who expect lower stock market prices) argue that the stock market is totally overheated and a correction is overdue. They are absolutely right about the 307 days, but is that a lot or a little, and does it mean the stock market has to go down? Not necessarily.

The chart shows the length of all stock market moves on the U.S. stock market since 1928 without a correction over 5%. By historical standards, 307 days is definitely long, but it could be 270 more days. So the 307-day justification is not a conclusive argument.