Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The equity market ’Misery Index’ is down 34% this year
Peter Garnry
Chief Investment Strategist
Summary: The equity market 'Misery Index' consists of the four worst performing industries this year due to Covid-19 being oil & gas, airlines, hotels, restaurants & leisure, and banks. The index is down by 34% this significantly underperforming the Nasdaq 100 which is up by 30% in the same period. The K-shaped recovery that we are observing in the economy is also observable in the equity market and it has implications for wealth concentration. From a market perspective the misery index is interesting because in our view this index will better discount, and thus filter out noise, actual progress on a vaccine or treatment of Covid-19, or just improving economic activity.
Many have heard of the ‘misery index’ in economics which is basically the unemployment rate + inflation rate where a low number is better than a high number. Findings suggest a lead from an increase in the misery index and subsequent crime rate across many countries. The index has been critised for putting too much weight on inflation (equal weight) as unemployment rate is a stronger factor for happiness. That aside the misery index has its merits and in today’s equity research note we have taken the step to create an equity market ‘misery index’ consisting of some of the hardest hit industries due to Covid-19.
The equity market misery index consists of four industries: oil & gas (30% weight), airlines (20%), hotels, restaurants, and leisure (20%), and banks (30%). We use MSCI World total return indices to measure performance on each industry. The equity misery index is down 34% this year compared to the Nasdaq 100, reflecting the global technology sector, which is up 30%. This staggering divergence in performance within the economy in just nine months is what we call the K-shaped recovery. Read Steen Jakobsen’s latest macro research note called Beware the implications of the K-shaped future, which is good read on what it means in terms of macro. For the equity market the K-shaped recovery means higher equity index concentration driven by technology companies and increasing wealth concentration which will directly lead to regulation in the future.
What the misery index is also telling us is that the situation on the ground in the physical mobility world deteriorated significantly in September as the index declined by 7.6% as a second wave of Covid-19 cases in Europe accelerated putting into question whether new mobility restrictions were coming. The declines have recently been driven by banks and especially European banks to an extent where they have become so cheap that we have covered those European banking stock over two research notes (here and here) over the past two days.
The equity misery index has been added to our basket of indicators that we monitor regularly in the Saxo Strategy Team. Any real progress on vaccines or treatment of Covid-19, or changes in restrictions of mobility will immediately be discounted in the misery index and thus it will work as a good indicator for when the K-shaped recovery is converging to a more synchronized rebound. It is worth noting in the chart below covering a longer period that the K-shaped economy was slowly evolving ahead of the Covid-19 pandemic but was then supercharged by the crisis. Will it ever again converge?
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