Opinion

The US macro data show a mixed picture. GDP – before revisions at least –  has contracted for two quarters in a row. For Europeans, that is a recession.

The ISM Manufacturing index fell further, but is still above 50. ISM Services unexpectedly rose to 56.7. More than half a million jobs were added in July. And yet it has felt like a recession for a while.

Forty years ago this week the bull market started in the United States. Not just any bull market, but the biggest bull market ever. Despite the crash of 1987, the dotcom graveyard, the attacks of 11 September 2001, the Great Financial Crisis and the Covid pandemic, this bull market continued to rise, fuelled by structurally falling interest rates, higher valuations and sharply rising profits.

The Dow Jones bottomed forty years ago on 12 August 1982 at 777 points, the same level as in January 1964. 

Retail giant Walmart issued another profit warning last week. And the underlying reasons point to a stagnant US economy.

Walmart pointed to a change in the spending pattern of American consumers. As a result of the continuing rise in food prices, Americans have no money left for other purchases. In order to get rid of the increasing stock, Walmart has to lower its prices considerably, which results in lower profits.

And then things moved fast. Business confidence fell to worrying levels in July, making a recession, especially in Europe, seem inevitable.

The S&P Global Flash Composite (Manufacturing + Services) PMI for Germany fell to 48.0. Well below the “magic” level of 50, seen by many as the line between economic growth and contraction - even though the actual level of negative GDP growth is considerably lower. The Manufacturing PMI also fell to 49.2.

Time and again I look for it. And every time I do not find it. What is it about? I look for the word “money growth” in interviews and speeches by board members of the European Central Bank. That is strange and revealing at the same time. 

The earnings season has only just begun, but we are already seeing some examples of what will become a trend: fewer companies beating expectations.

Investors like to be positively surprised, so companies tend to be overly cautious in their expectations so as not to disappoint those same investors. But when the economy is heading for recession, expectations are met less often and this earnings season is probably the first indication of this.

Les investisseurs épargnés par le mal de mer malgré la houle sévissant sur les marchés financiers peuvent se targuer d’avoir un solide pied marin.

C’est sans conteste un atout pour garder l’équilibre durant la tempête et ne pas se laisser intimider trop rapidement par de brèves turbulences. Cela permet de de tirer parti d’opportunités à long terme et d’absorber les revers passagers avec la résignation nécessaire.

 

Graphique 1 : Évolution de l’indice mondial des actions depuis le 01.01.1991 (démarrage à 100) 

Negative surprises put a cap on the upside potential, especially for equities. As a rule, investors react strongly to surprises, often shaped as economic data. After all, the consensus expectation should already be incorporated in the prices. 

It is therefore no coincidence that there are indices that mathematically determine the degree of surprises. A good example are the Citi Economic Surprise indices. 

Problems with energy supplies, a perfect storm of geopolitical uncertainty and, in the autumn, probably another Covid flare-up… Investors in European equities are not having it easy, and yet not everything is doom and gloom.

At first glance, there is little reason to be optimistic about Europe and European equities by extension. The enormously weak euro bears witness to the malaise on the Old Continent. Optimists will argue that exporters will benefit, but then the energy supply must be secured, and it is not.

Des problèmes d’approvisionnement en énergie, une parfaite tempête d’incertitude géopolitique et, à l’automne, probablement un nouveau rebond du Covid… Les investisseurs en actions européennes sont en difficulté, mais tout n’est pas sombre.