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  • AutorenbildRalf Pühler

Sunshine or Rain: an experiment to forcast the economic development for Q4/2023

At the end of July, the DAX shone with a new all-time high. However, stock sentiment subsequently darkened due to major interest rate hikes and concerns about China. How are the market-determining (crisis) factors developing in the fourth quarter? What about the year-end rally and how should investors behave?

Also homemade hard economic times in Germany

The economic risks in the Eurozone, but especially in Germany, cannot be denied. Not least because of the deterioration in (economic) political sentiment, the German economy is currently shrinking more sharply than it did during the Corona pandemic in spring 2020. Despite stabilizing ifo business expectations, the path to winter recession is set.

The industry picture also shows general disillusionment. Retail is not really coming out of its misery due to an increasing tendency to save money and the graveyard mood continues in the construction sector. The federal government's planned subsidies for the construction industry are just a political illusion that is just a drop in the ocean due to skyrocketing interest rates and high material costs. If the state - which is, however, more than cash-strapped - does not act directly and massively as a builder and is not prepared to clear out the excessive building regulations and bureaucracy, there is no end to the housing shortage in sight.

What is particularly sobering is that the manufacturing sector, Germany's core competency, is raising the question of location more and more loudly due to persistently high energy prices and various "ideological jokes". The pessimistic export expectations among mechanical engineers or in the metal industry are already bad enough due to the current difficult global economic situation. People would like to have a lottery for economic competence and hope that Berlin will win the main prize. Unfortunately, they didn't buy a ticket.

Overall, according to the ifo economic matrix - the situation and expectations are related to one another - the German economy is heading firmly towards recession. The growing economic uncertainty is also affecting the DAX, whose price fluctuations have recently increased again.

The US economy has its downsides, but it also has strong sources of light

In the USA, the combination of higher credit costs and lower credit availability is robbing the credit-dependent US economy of important growth impulses. The Fed's interest rate hikes are gradually eating their way through the economy.

Expensive consumer loans, the depletion of savings from the pandemic period and the impending resumption of student loan repayments from October will particularly affect the main driver of the US economy, consumption.

There will also be slowdowns if Democrats and Republicans in Congress cannot agree on a budget plan by October 1st. It doesn't look like there will be a (compromise) solution any time soon. The upcoming presidential election campaign sends greetings. The Republicans are even blocking the agreement on an interim budget. In the event of escalation, there is a risk, among other things, of the closure of parts of the public administration (government shutdown), which acts like sand in the American economic process. Things would get serious if late salary payments or order delays led to loan defaults or even company insolvencies. Credit card debt default rates at small regional banks are at record highs underscoring the financial stress that is already present.

After all, since the obviously impending government shutdown is having a negative impact on the economy, which in the best case scenario will also have a slowing effect on inflation, the Fed has even less reason for a restrictive interest rate policy. And the longer the shutdown lasts, the more this puts pressure on US government bond yields.

Market situation - Given the crises, can we even speak of a year-end rally?

The fact that the majority of central banks worldwide - including the Fed, ECB, Bank of England, Swiss National Bank - have now ended their cycle of interest rate hikes or, as in Brazil and China, have already made their first interest rate cuts, favors an early stabilization of the interest rate-sensitive stock markets.

In view of the latent economic risks and decreasing inflation risks, the Fed, like the ECB, will probably forego further interest rate restrictions. Towards the end of the year, interest rate reduction fantasies are even played out on the markets, which ends the euro's weakness against the US dollar.

In the short term, the Fed will continue its verbal fight against price increases in order to keep inflation expectations down with words but not with actions. This is causing temporary nervousness on the stock markets. In this context, the recent rapid rise in yields on 10-year US government bonds to a 16-year high is causing sand in the stock market. The positive news, however, is that rising (credit) interest rates are counteracting inflation, which suggests that interest rates will flatten again at the end of the year and thus higher share prices.

The oil price increase of around 30 percent since the end of June is causing fears of inflation to flare up. The driving force is the funding cuts from Saudi Arabia and Russia that are extended until the end of the year. But they have largely used up their powder. Although further cuts would increase prices, they would ultimately lead to an overcompensating decline in volumes due to their damaging effect on the economy. Falling revenues would massively hinder Russia's and Riyadh's war chest from being replenished to finance its economic reforms. In this respect, the upward potential for oil prices and therefore inflation has largely been exhausted.

At the fundamental level, there is no chance of a hard economic landing in the USA. In its competition with China, America is pursuing a thorough industrial policy to secure strategically important supply chains, for example for semiconductors and storage technologies. The massive economic stimulus programs launched for this purpose, which will lead to budget deficits of a good six and almost seven percent in 2023 and 2024, respectively, cushion the monetary policy braking effects.

As part of the US reporting season for the III. Stable results are expected in the quarter of 2023. The energy sector is primarily responsible for a slight decline in profits due to negative base effects compared to the same quarter of the previous year. In contrast, tech and finance are supporting. In any case, it depends on the outlook and profits are likely to work their way back into growth territory by the end of the year. Because America is not experiencing a recession, but a soft landing.

As part of the German reporting season, investors will monitor the results for indications of the extent to which companies can decouple from deteriorating conditions in Germany as an industrial location.

The companies listed in the DAX and MDAX generate around 80 percent of their sales abroad. This makes them less sensitive to the German economic woes. In fact, the fact that the economy in China will gradually regain its momentum due to extensive fiscal and monetary policy measures speaks just as much for a global economic stabilization and strengthening of German export stocks as the soft US landing.

The current poor economic situation can be described as: “The night is darkest before morning”. The sunrise will come. In any case, German stocks from the first and second tier of stock exchanges are available cheaply compared to both US stocks and their own historical averages, with significant valuation discounts. This particularly applies to European and German industrial stocks that have real value characteristics. The ebbing of the crisis affects their prices like the tide affects ships.

Overall, the vision of a year-end rally is intact.

Sentiment and chart technology DAX - We're not quite there yet, but we're on the right track

From a sentiment perspective, investors are currently reluctant to take cover. The Fear & Greed Index published by CNN Business has slipped into extreme fear territory. Shaky hands abandon their positions, but this encourages the formation of a bottom. In addition, the seasonal weakness expires at the beginning of October.

In any case, institutional investors hold comparatively large amounts of cash. These financial resources are available and will flow back into the stock markets if the prospects continue to improve. Investors should therefore use price setbacks to make purchases. You are also well served with regular stock savings plans. This means that investors receive more shares for the same money when prices are weaker. And when prices rise again, you can enjoy noticeable leverage.

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