The stock exchanges cheered: After the runoff election in the US state of Georgia are the S&P-500 and Dax jumped to records on Wednesday. After the riot by supporters of US President Donald Trump in the Capitol, the US index has given back half of the gains. Nevertheless, he ended the trading day with an increase of 0.6 percent.
In the election, the two Democratic candidates Jon Ossoff and Raphael Warnock stole the seats from the Republican incumbents. Both parties in the Senate now have 50 votes – and in this case, the vote of future Vice President Kamala Harris is decisive.
This means that US President-designate Joe Biden will in future be able to rule not only in the House of Representatives but also in the Senate and thus quickly implement his election promises. Many experts therefore expect that not only the one-off payments from the latest $ 900 billion stimulus package will be increased from $ 600 per adult to $ 2000, for which the Democrats had already voted. Rather, Biden should stimulate the economy with further fiscal programs and a billion dollar infrastructure program, which would further fuel inflation.
Bet on value stocks and cyclicals
Because of this prospect, interest rates on ten-year US bonds – by far the most important signal generator for the global financial markets, especially the stock markets – have shot up to 1.05 percent. You are thus indicating a strong recovery in the US economy. That is the highest level since March. In this environment, investors – as usual – grabbed hold of value stocks and cyclicals.
The latter are companies from cyclical sectors such as automobiles, chemicals, semiconductors and banks. Value stocks are low-valued papers, measured by the P / E ratio, dividend yield, or price-to-book value ratio (P / B). With the KBV, the market value is divided by the equity. The idea behind it: Value stocks offer the greatest potential to catch up compared to other stocks, especially the highly valued stocks.
On the other hand, in an environment of rising US interest rates, the counterpart of value stocks and cyclicals, i.e. growth stocks and stocks from defensive sectors, are less in demand – they do not rise quite as strongly, or even fall slightly. Growth stocks are stocks of companies with strong growth, especially in terms of sales, especially US technology stocks Apple , Microsoft , Facebook , Alphabet and Tesla . Defensive sectors are not very cyclical, such as health, telecom, consumer goods or food.
Accordingly, yesterday, Wednesday, the S & P500 Value Index shot up by 2.3 percent, while the S & P500 Growth Index fell by 1.0 percent. The trend of the past few months has thus continued, when value stocks rose by 15.6 percent compared to August 3, significantly more than growth stocks (11.7 percent).
After interest rates for ten-year US bonds were close to the record low at 0.5 percent on August 4, they then turned up sharply. With US interest rates likely to continue to rise significantly over the next few weeks, value stocks and cyclicals should continue to rise faster than growth stocks and defensive papers.
Bank stocks have additional tailwind
In the Dax, too, value stocks and cyclicals topped the list of winners in the middle of the week, especially the Deutsche Bank with 6.0 percent. The price-earnings ratio (P / E) of the institute is 12.0, well below that of the Dax with 16. In the following places Allianz (5.2 percent, KGV 10.5), BASF (4.6 percent, KGV 13.3), Heidelberg Cement (4.2 percent, KGV 9.4), Linde (4.0 percent, P / E 26.0) and Bayer (4.0 percent, KGV 7.5).
The paper of Deutsche Bank is also benefiting from the sharp rise in interest rates, as the rising US interest rates are also pulling those on government bonds up, which is why those have climbed to minus 0.56 percent. This improves the prospects for the banks’ net interest income. As a result, the KBW Nasdaq Bank Index, which reflects the price development of US institutions, shot up 6.8 percent yesterday. In a higher interest rate scenario, bank stocks on both sides of the Atlantic should be in the fast lane.
Favor small and mid caps
Because value stocks are also weighted higher in small and mid-cap indices, i.e. companies with a small and medium-sized stock market value, than in large-cap indices such as S & P500 and Dax, the US small-cap index Russell 2000 should also be in the fast lane be like MDax and SDax . The trend of the past few months would thus continue.
Since August 3, the Russell 2000 has shot up by 36.6 percent, while the S & P500 is up “only” 13.8 percent. Investors who are willing to take risks should therefore increasingly rely on Russell 2000, MDax and SDax.
Gold price collapses
In contrast, the price of gold has collapsed due to rising US interest rates and the record drive for the S & P500. However, the slump is likely to be short-lived, as the Fed is unlikely to watch for long when interest rates close up. After all, the government, corporations, households and banks have accumulated debt totaling more than $ 80 trillion – a record. That is around 400 percent of the annual economic output!
Fed Chairman Jay Powell and his colleagues could therefore soon signal that if necessary they could top up the bond purchase program by net $ 120 billion a month in order to push interest rates down again. Then the gold price should turn up. At the same time, the sharp rise in inflation expectations is pushing real interest rates down, which is boosting the gold price.
The real interest rate based on ten-year inflation-protected bonds, at minus 1.02 percent, is not far from the record low of minus 1.08 percent. A falling real interest rate boosts the gold price. The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate.
Bitcoin is on a record course
Hardly anything else seems to better reflect how rapidly investors’ concerns about inflation are growing Bitcoin . After the results from Georgia emerged, the cryptocurrency shot to a record high of more than $ 37,000.
Ultimately, further economic and infrastructure programs worth billions would mean another glut of dollars, whereupon the greenback would devalue even faster than it already is. Obviously, many investors fear that inflation will not rise gradually or in an orderly fashion. In this environment, the rally in Bitcoin could accelerate.