Stock markets remain stable

The probability of a hard landing for the US economy remains low - if there is no recession in the forthcoming interest rate correction phase, the stock markets should continue to rise.

The authors

From the strategy team of DJE Kapital AG 

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

We also remain fundamentally constructive for April. The US economy continues to hold up well. Although the inflation spurt is behind us, inflation is stubbornly holding steady at current levels. As a result, only two to three (more likely two) interest rate cuts by the Fed are expected. If there is no recession in the forthcoming interest rate correction, the stock markets could continue to rise. The current situation is easily comparable with the situation in the mid-1990s. From the perspective of market technology, there is still increased optimism, which suggests that the stock markets will not run away in the short term. A massive slump on the markets is not currently expected. Market breadth could improve in the coming months. Classic value sectors such as automotive & suppliers, commodities and energy are likely to be interesting. Japan and gold remain interesting as an admixture.

Opportunities

  • Shares in companies whose business model is largely independent of the economy with high margins and which ideally also have a certain cost-cutting potential
  • Probability of a US recession or a "hard landing" of the US economy remains low; if the recession does not materialise in the forthcoming interest rate correction, the stock markets should continue to rise
  • In the longer term or with a view to the next ten years, there are few reasons why equities should not perform similarly to the last ten years
  • Japan: Seasonality continues to favour Japan; historically, the second quarter has usually been the strongest quarter for Japanese equities; Japan also has the lowest real interest rate internationally
  • In Eastern Europe, Poland in particular is performing well; Sloty government bonds also continue to develop favourably
  • Classic value stocks and thus sectors such as automotive & suppliers, commodities and energy are currently underweighted in global portfolios; a higher than expected interest rate environment and an improving economy (PMIs USA / China back above 50) speak in favour of these sectors
  • Small caps: The valuation discount to large caps is currently very high, an improving (US) economy could support companies

Risks

  • The fragility of the US financial system jeopardises the global economy; however, the Americans will not risk a new financial crisis and will take timely countermeasures if problems arise
  • Geopolitical conflicts in Ukraine and the Middle East are likely to continue to smoulder; Americans increasingly see this as a European issue
  • Technology and healthcare stocks that have performed very well should be monitored: Such companies remain structurally interesting, but may have run a little hot in the short term

Fundamental indicators

  • The US economy remains resilient; the labour market remains strong, the interest rate cut fantasy has shifted back in time
  • If the upcoming interest rate cuts are "non-recessionary steps", the environment for the US stock market should remain positive
  • Economic development in Europe is expected to be weaker than in the USA
  • China: Purchasing Managers' Index back above 50, but sustainability of this level not certain

If today were US election day, Donald Trump would win. He is likely to increase tariffs on Asian and European products. In contrast to Biden, Trump sees other countries more as economic competitors; NAFTA countries, on the other hand, are likely to be left out when it comes to tariffs. As president, Trump is likely to focus more on economic rather than military confrontation in geopolitical terms.

US fiscal policy is likely to remain expansive. As a region, the USA will probably continue to attract a lot of foreign capital. Possible positive effects from the Inflation Reduction Act (IRA) have largely not yet materialised.

China: Even though the Purchasing Managers' Index (PMI) has risen to over 50, the question remains as to how sustainable this development is. Property prices have not yet stabilised, but the secondary markets are performing somewhat better. Tourism spending, on the other hand, is developing well.

Monetary indicators

  • Inflation in the USA and Europe under control
  • Interest rate cuts are expected

Thanks to the most massive and fastest interest rate hikes in history, the Fed and the ECB have got inflation under control. The inflation spurt is behind us, but inflation remains stubbornly high at the current level. It is unlikely that the ECB will start cutting rates before the Fed, but this cannot be ruled out completely. If the ECB were to cut rates before the Fed, this would further weaken the euro.  The expected start of interest rate cuts is undoubtedly a good prospect for this year. However, it may be some time before interest rate cuts have a positive effect.

Market technical indidators:

  • Indicators such as NAAIM, Fear & Greed, cash ratios in the fund manager survey tend to be negative

At the moment, market technology is rather negative based on indicators such as the NAAIM. This indicator shows the equity exposure of professional US investors. The Fear & Greed Index and the cash ratios in the fund manager survey also tend to be negative.

 

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