A passion for records prevailed stock markets for a long time, while the prices of major stock indexes around the world rose from one high to another.
But now the situation is changing in the stock markets, because the hopes for artificial intelligence as a driver of growth and falling interest rates have been replaced as the main themes of the market. Instead of greed, fear prevails, at least for now, according to today’s (2.8.2024) Handelsblatt publication.
Before the weekend, the shockwaves of the stock market earthquake spread around the world. In the US, the broad S&P 500 is down more than 4% from its weekly high. Today it hit its lowest level since mid-June. The European benchmark, the Eurostoxx 600, lost 3% in value over the same period, while Japan’s top index, the Nikkei, fell more than 8%.
The wave of sales also hit the German stock market. The leading index, the Dax, had on Thursday (1.8.2024) the weakest trading day of the year, falling 2.3%, and fell a further 2% on Friday. As a result, it fell to its lowest level since early March.
“The climate is changing,” say DWS investment strategists. Investors are now “disappointed” in two ways: Data from major US technology companies is weaker than they expected. More importantly, however, economic concerns are spreading for the first time in a long time.
Currently, European stock markets benefit from the expectation that economic recovery will gain momentum in the second half of the year. In the US, the strong US economy is already boosting stock markets. Both are now in question.
Three bad news from the USA
There were three unexpected pieces of bad news in the US this week. On Friday, the labor market report for July showed that only 114,000 new jobs were created and the unemployment rate rose to 4.3%.
Both figures were a negative surprise as 175,000 new jobs were expected and the unemployment rate was 4.1%. According to experts, job growth should be at least 100,000 per month to provide jobs for America’s growing working-age population.
Labor market data already disappointed on Thursday. The number of weekly reported initial jobless claims in the US rose to the highest level in a year.
249,000 citizens applied for state support, more than expected. The four-week average rose to 238,000. According to economists, the labor market will be critical if the first claims rise to 270,000.
In addition, the Institute for Supply Management’s (ISM) hyped national purchasing managers’ index released on Thursday fell to the lowest level in eight months. At 46.8, it fell well short of expectations and even fell below the 50-point mark. The index thus indicates that the US economy may fall into recession.
According to the DWS, it is particularly disappointing that the employment share of the ISM index has declined significantly. At 43.4 points, this is the lowest level since June 2020 and thus falls to the level of the coronavirus pandemic.
German automakers disappointed with quarterly numbers
Things are no better in Europe, according to Dekabank’s chief economist Ulrich Kater: “The German economy is not improving at all. Gross domestic product was lower in the second quarter than in the first. Investments in equipment and constructions have decreased significantly. ”
This growth is already reflected in the quarterly figures of the German car manufacturers. After Mercedes-Benz, Volkswagen and BMW also reported contracting earnings on Thursday.
This development is also reflected in the German labor market. The number of unemployed has risen by half a million since May 2022 and is approaching its 2020 peak “There seems to be no improvement on the horizon as companies have not announced significant hiring according to Ifo surveys Institute,” said Cater. .
At the same time, bad economic news from China, a major export country for Germany, continues unabated. Recently, the Caixin Purchasing Managers Index, which measures sentiment among small Chinese companies, fell from 51.8 to 49.8.
World economic concerns are reflected, among other things, in the bond market. Investors are once again buying more bonds, which are seen as a safe investment in tough times. This causes prices to rise and returns to fall.
Treasury yields fell to six-month lows
The yield on 10-year German government bonds fell below 2.2%, their lowest level since early February. The yield on the 10-year US Treasury note fell to its lowest level this year at 3.8 percent.
Strategist Jim Reid from Deutsche Bank Research explained: “This is because investors are increasingly pricing in rate cuts next year due to growing economic concerns.”
In the US, interest rate negotiators now see a 91% chance that the Fed will cut rates at least six times in the next twelve months. “That’s a move we’ve only seen in recent cycles during recessions,” Reid pointed out.
In this case, the interest rate cut is not a reaction to the desired fall in inflation, but a rescue operation to stabilize the weak economy.
In fact, speculation is growing that the Fed should immediately cut interest rates by 0.5 percentage points in September instead of 0.25 percentage points. Interest rate negotiators currently place its probability at 64%. A month ago it was 6%.
AI returns are already priced
The fear of investors is also rising because one of the main reasons for the price growth in recent months is the loss of steam. Investors are increasingly skeptical of the prospect of growth related to the emerging topic of artificial intelligence (AI).
Investor happiness is so great and the rise in share prices is so strong that companies can no longer exceed ambitious expectations in the current reporting period.
Investors have already discounted many views on the progress of the commercialization of artificial intelligence. Today’s fall was seen in reactions to the second quarter data of major US technology companies.
According to Marc Decker, head of equities at Quintet Private Bank, the market has recently not only been quick to accept real but also “perceived reasons to dump high-value tech stocks.”
Microsoft’s figures, for example, are “basically stable”, says Uwe Streich, equity strategist at Landesbank Baden – Württemberg (LBBW), pointed out.
The problem, however, is that the costs of building and expanding data centers for AI applications have increased by 78%.
Microsoft’s chief financial officer, Amy Hood, admitted that the billions invested in data centers may only pay off in the next 15 years or so. “The fact that it’s taking so long upsets investors,” Streich said.
Similar problems exist at Google’s parent company, Alphabet. Q2 data was better than expected, but concerns over increased investment in artificial intelligence had a bigger impact.
However, the indicators remain close to the records
Despite the severe price loss, it remains to be said that the stock market is far from panic. After recent losses, the S&P 500 is up 12% year to date. This is only 5% off the record high hit in mid-July.
Dax is in a similar situation. Although it fell below the 18,000 mark, only 6 out of 20 investment strategists thought it would reach that level when surveyed by Handelsblatt before the start of the year.
This is why the volatility indicators, which indicate the range of changes expected by professional investors in the next 30 days, are not worse today. The higher the values, the greater the expected volatility.
Although the VDax for Germany rose by more than 20% this week, the level is still moderate at 18 points.
With the opportunity to arrange, prices below 20 signal a calm side of the market. At the beginning of the war in Ukraine, for example, the VDax was over 40 points, and during the coronavirus pandemic it was over 60 points.
A US recession is not a baseline scenario but a threat
Therefore, the major Swiss bank UBS advises investors to remain calm. Mark Haefele, head of global wealth management investment strategy at the major Swiss bank, believes fears of a recession are “premature” for now.
In fact, recent data shows that US industrial production is still rising, retail sales are above trend and US gross domestic product rose 2.8% in the second quarter on a year-over-year basis. basis, more than expected.
For Haefele and his colleagues, these numbers show that the US economy is “not headed for recession, but for a soft landing”.
Investors can only hope that this is indeed the case, because if the US economy falls into a mild recession, David Kelly, the global chief strategist of JP Morgan Asset Management, believes that the Investors should be prepared for a “price loss of 25% to 30%” in equity markets.