- DAX – WKN: 846900 – ISIN: DE0008469008 – Price: 12 813.03 points (XETRA)
- S&P 500 – WKN: A0AET0 – ISIN: US78378X1072 – Price: 3825.33 points (S&P)
Why did the indices slightly rebound at the beginning of the second half of the year and how far down could the S & P500 and DAX fall?
After the dramatic fall in prices in the first half of the year DAX and S&P 500 slightly revived at the beginning of the second half of the year on Friday 1 July. The economic data from the US released on Friday still raise concerns and clearly increase investors’ fears of a recession.
The important Institute for Supply Management (ISM) purchasing managers index for the US industry fell from 56.1 points to 53.0 points in June – the lowest level since June 2020 – and was a mile lower than economists’ estimate on 55 points. The indicator thus confirms that the economy of this sector has practically fallen off the cliff.
At the same time, the new order component declined to 49.2 from 55.1 below the 50 mark, which is the dividing line between up and down. There are also several other elements of the index that are of concern. I will analyze it in detail next Tuesday, July 5 in the “Euer Egmond” program presented by BNP Paribas certificates.
A little hint: on Tuesday night I have v “Your Egmond” program presented by BNP Paribas certificates analyzed the prospects for the S & P500, DAX, Euro-Dolar and Gold.
The Atlanta Fed forecasts a sharp contraction in the US economy
Additionally, data on construction spending in the US confirmed uncertainty among investors. In May, they fell by 0.1 percent. month on month, while economists predicted an increase of 0.5%. Investors ignored the fact that data for April were revised upwards. An originally reported increase of just 0.2 percent turned to 0.8 percent.
A few hours after the publication of the US industrial purchasing managers’ index and the US construction spending index, the Atlanta Fed lowered its forecast for the US economy. Based on the real-time model, the Atlanta Fed now forecasts an annual decline in economic output of 2.1 percent in the second quarter, while the previous estimate was still minus 1.0 percent on an annualized basis. The annual value is calculated by multiplying the change for the previous quarter by four.
In the first quarter, the economy contracted by 1.6 percent year on year. If there was indeed another decline in the second quarter – the data will be released on Thursday 28 July – it would be the second consecutive quarter with a negative result, which would mean the economy would enter a recession. They are now adapting quickly to this scenario, which came as a complete surprise to many investors in the stock and bond markets.
Why did the S & P500 and DAX rise on Friday?
Why did the S & P500 and DAX indices rise on Friday despite mounting fears of recession? On the one hand, it was the beginning of a month or a quarter, which is why new money flows into the stock exchanges, e.g. through savings plans. On the other hand, they are supported by the collapse of 10Y bond yields in the US after the publication of weak economic data from the US. Interest rates fell the previous day by 10 basis points to 2.88%. after they slightly recovered from the daily low of almost 2.80%.
It’s worth noting, however, that investors continued to resort to defensive stocks, so the biggest winner on the S & P500 index was the utilities sector, which grew by 2.5%. This again flawlessly shows investors’ concerns about a recession. On the other hand, the IT sector was one of the largest Apple , Microsoft, NVIDIA , VISA, MasterCard card, Broadcom and Cisco systems the bottom of the S & P500 index with an increase of only 0.3%. Investors know the industry is likely to suffer more than average from a recession.
Sales pressure is also exerted by disastrous prospects for the US memory chip maker Micron technology the current quarter, which is in stock and a number of others from the industry such as Nvidia, Advanced Micro Devices , Intel and Texas instruments pulled with me.
How low can the S & P500 and DAX slip?
It’s a million dollar question that no one can answer because it depends on many factors. However, I would not be surprised if the DAX could rise again next Monday, July 4 as the US markets are closed due to Independence Day and therefore there is no interference from there, especially since the US bond trading is closed. Back then, fund managers in Germany and Europe were able to pull the market up with small orders first.
In the evening, I will take a closer look at the release of data on sales of new passenger cars, pick-ups and trucks from the US. In May, sales fell to an annual rate of 12.68 million units, 25 percent below the previous year’s level. I expect persistently weak data for June, which should deepen fears of recession.
Contrary to many investors, I assume that we saw the peak of interest rates for ten-year US bonds on June 14 at 2.5%. and that they should drop sharply in the coming weeks and months. The more aggressively the Fed raises key interest rates, the faster ten-year US bond rates should not rise but rush downward as investors fear a recession.
The S & P500 is still a big bubble
Such an environment should provide continued downward pressure on the S & P500, and thus also on the DAX, especially as both indices are still highly valued, and analysts will only start to significantly lower their earnings estimates for the second half of 2022 and the entire 2023, when half of the Data annual figures are published. I believe that the approximately 10 percent increase in earnings for the S & P500 envisaged in the 2022 consensus is as much a waste as the 7 to 8 percent increase planned for 2023.
With that in mind, I believe the S & P500’s P / E ratio of 15.9, based on the current estimate of earnings for the next 12 months – the most important indicator for analysts and investors – is far too high. Estimates for the next 12 months are now calculated in early July by weighting 2022 with 6 months and 2023 also with 6 months. Therefore, I assume that the S & P500 decline towards 3,500 points will clearly continue, which should continue with the DAX as well, and the index should soon drop below the 52-week low from March at just below 12,500 points.
Whether or not the S & P500 drops below 3,500 depends largely on when the Fed reverses policy and cuts rates to zero and launches a massive new money-printing program. This is the only hope for investors in a poor economic environment. In my opinion, this is likely to happen in late August at a central bankers’ meeting in Jackson Hole, Wyoming, on August 25-27 at the earliest.
In the meantime, Fed chairman Jay Powell and his colleagues are likely to reiterate their intention to raise interest rates sharply to fight inflation. But investors are starting to have more and more doubts about this, which I will show at the Tuesday show.
in my program “Yours Egmond” I analyze the markets every week!