What kind of investor are you: Value vs. Growth?, Macroeconomic starting point.

Chart of the week

The chart shows the return of the ARK Innovation ETF managed by Cathie Wood (orange) and the return of Berkshire Hathaway, the investment company of investment legend Warren Buffett.
Why it matters
The two investment styles couldn't be more different. Cathie Wood embodies the growth investment style. She invests in growth companies like Amazon, Tesla, Zoom, Coinbase, etc.

Legendary investor Warren Buffett embodies the Value investment style like no other, investing primarily in value stocks. His main investments include Coca-Cola, Kraft-Heinz, American Express and Chevron.
Growth investors must be able to live with large fluctuations. Growth stocks gained nearly 200% from February 2020 to February 2021, but plummeted over 60% since then to date. Subtance stocks gained only 15% from February 2020 to February 2021 and have gained another 10% since then,
What type of investor are you? Do you prefer the roller coaster and excitement or steady, slow rise and sleep soundly for it? Before you invest, you should be clear which strategy you want to pursue.

Macroeconomic starting position

The chart shows the inflation trend in the current cycle, since 2018 (blue) and the one from 1972 to 1974 (orange). Many analysts compare the current development with that of 1972, as inflation also rose sharply in that period, after very low inflation.

The charts below also suggest that we could see a similar inflation trend.

Inflation has two important components. A large part is rising commodity prices and energy prices (Goods, blue). This component of inflation fluctuates very strongly and is currently the main driver of high inflation. However, this part of inflation is already falling again.
The second main part of inflation is rising costs for companies and especially rising wages (Services, orange). This part of inflation is still rising strongly. How this part of inflation develops will be decisive for stock market performance in 2023. If it continues to rise sharply, central banks will be forced to raise interest rates more than currently assumed.

The chart shows very well that the main factor influencing inflation (orange) was input prices (blue). These include commodity prices, primarily energy, but also transport costs. In addition to the war in Ukraine, these costs had also skyrocketed due to the imbalance in supply chains because of Covid. These costs are currently all falling, and the question is how sustainable this is.

The graph shows the level of freight costs (blue). For a delivery in May 2023, the freight costs are partly lower than before Covid. It is therefore conclusive to assume that these costs will remain low until spring 2023.

The chart shows the interest rate hikes already implemented by the U.S. Federal Reserve (dark blue) and those still expected by mid-2023 (light blue shaded the general consensus and dark blue shaded the opinion of the renowned investment bank Goldman Sachs).
Based on the assumptions that inflation will decline, the sharp rise in interest rates should also be over. However, a moderate increase will still take place until mid-2023.
The situation in Europe is likely to be somewhat different. There, it can be assumed that interest rates will rise even more sharply.

The chart shows the price trend of the S&P 500 since January 2022 (orange) and that in 2007 during the financial crisis. Many analysts compare the two periods and expect further lower stock markets. We consider this concern to be exaggerated and do not think that the current situation is comparable to the financial crisis.
We are in a very different economic environment and, as explained in previous market reports, the hedging and cash levels of the largest institutional investors are currently at record levels. So a big sell-off should not happen.

However, as long as interest rates continue to rise, we remain committed to value stocks:

The chart shows the valuation of growth stocks minus the valuation of substance stocks (using the price/earnings ratio). The valuation of growth stocks versus substance stocks has already fallen sharply, but we think this trend will continue.

The chart comes from a Bank of America survey of the world's largest institutional money investors. They were asked who was overweight in equities. The number of investors overweight equities is at its lowest level since the financial crisis. All it takes is a little positive news and prices shoot up as the big investors get back in.

The golden cross
Finally, a foray into technical market analysis:

The chart shows in red how many shares have an average price over the last 50 days that is higher than the average price over the last 200 days. This is called the "golden cross" in technical analysis. In technical analysis, the stock is then in an uptrend. In blue, the price trend of the S&P 500 is shown.
The red line shows the market breadth. It shows overall how many stocks are in an uptrend or downtrend. Interesting conclusions can be drawn from this. For example, the red line peaked in October 2021 and the market continued to rise. New highs in the stock market with a decreasing market breadth is the harbinger of a trend reversal. The index is driven up by a few stocks with a high weight in the index. The trend reversal then also occurred in the broad index in January 2022.
Currently, the indicator provides a buy signal. The broad index is still in a downtrend, but more and more stocks are already in an uptrend. This is usually a strong buy signal. Both 2019 and 2020 saw a prolonged upward movement with the same constellation.

With this market report, we say goodbye for this year. The next market report is scheduled for the second week of January 2023.

‍

‍

‍

‍