Challenging second half of the year

Looking ahead to August, we remain cautious. After the good performance in many stock markets in the first six months of this year, the next months could be more challenging.

The authors

DJE's strategy team continuously monitors and evaluates the markets using its proprietary FMM methodology based on fundamental and monetary criteria as well as market technology indicators.

From the strategy team of DJE Kapital AG

August and September are often difficult months from a seasonal perspective. In addition, the monetary situation can still be classified as negative. The US economy is holding up well, but economic risks are increasing strongly in Europe. Market technology indicators often tend more towards the positive, but do not yet provide a clear sell signal. Many defensive sectors have not performed at all in 2023 and therefore offer some catch-up potential.

 

Opportunities

  • Japan: relatively good money supply growth, "near shoring" beneficiary in Asia.
  • Energy sector: fundamental environment is improving (incl. declining drilling activity in the USA)
  • China region: Chinese government has recognised that it needs to stimulate the economy more and that the country remains strongly dependent on the development of the global economy; China's economy could recover more strongly in the medium term with more stimulation. This could also have a positive impact on the materials sector
  • (US) companies benefiting strongly from the US Inflation Reduction Act and thus experiencing a special fiscal stimulus
  • Quality bonds with maturities of two to four years continue to offer attractive interest rates with moderate risk

 

Risks

  • Market breadth has improved recently, but one cannot speak of a healthy rise as earnings did not rise with prices
  • Significantly declining M1 money supply in the US and Europe; according to our calculations, the investment environment has recently deteriorated further
  • Deep inversion of yield curves a signal for a hard landing
  • Deep and prolonged recession in Europe

 

Fundamental Indicators

  • Scenario of a global recession is unrealistic
  • In Germany and Europe, however, the economic risks are clearly increasing: strong weakening of the leading indicators, including the purchasing managers' indices, and deep inversion of the yield curve as signals for a hard landing
  • Europe and especially Germany could be facing a prolonged period of weak growth. Current political measures in Germany should be viewed very critically: politicians' lack of understanding of industry is likely to lead to increased relocation of production to the USA and Asia.
  • China: government has realised that it needs to do more to get the economy going

 

Monetary Indicators

  • Given declining but still high core inflation, quick interest rate cuts do not seem realistic. We expect the interest rate plateau level to persist for some time
  • Quote from US Federal Reserve Chairman Jerome Powell (dated 27/7/2023): "don't see inflation going back to 2% before 2025" => rate cuts could therefore come more slowly than currently assumed by many market participants
  • ECB will probably not raise interest rates further in view of the weak German economy
  • Overall inflation could also rise again from Q4 onwards (due to energy prices)

 

Market Technology Indicatores

  • Overall mixed picture: low put/call ratios and high optimism, e.g. at Greed & Fear or NAAIM (US Association of Active Fund Managers) are counter-cyclically negative, while high short positions on the S&P 500 and high cash ratios in the BofA fund manager survey are positive
  • Overall, sentiment data should limit the potential for another strong upward move; however, for a stronger correction, sentiment data would need to remain in positive (i.e. optimistic) territory for a longer period of time

 

 

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