Summertime blues or trend reversal on the stock markets?

21.08.2023

Summertime blues or trend reversal on the stock markets?

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Author - Andreas Auer, Josef Stadler

The MSCI World Equity Index for the developed countries reached a new all-time high in euro terms at the end of July 2023. The performance (index change including dividends) in the first seven months of this year was even more than 16%. In August the sign changed and world equities on an index basis fell again by more than 4% since the high on 31.7. What happened?

While the very good performance up to the "all time high" was mainly supported by the IT sector and by companies that benefited from the "post-covid" boom (travel and leisure industry), companies from the commodities sector or cyclical consumer goods manufacturers came under selling pressure recently. Even the companies that experienced unexpected highs this year due to the boom in artificial intelligence are now on average more than 7% below their highs for the year. Only the energy and health sectors, which clearly lagged behind the good market development in the first seven months, were able to develop positively again in August.

Although around 80% of the companies in the S&P 500 Index were able to exceed analysts' earnings expectations in the Q2 reporting season, which is now coming to an end, the positive market reaction failed to materialise in many cases this time. On an index basis, there has even been a decline since the beginning of the earnings season.

 

Why did the upward trend in the developed markets not continue in August?

The reasons are as varied as the different expectations and forecasts of market participants. One of them concerns earnings expectations. These are now no longer quite as optimistic for the coming year as they were before the start of the current reporting season. Many companies have become more cautious in their choice of words in their expectations for the current year.

From a macroeconomic point of view, the increased caution of companies seems quite justified. The inflationary environment may have been a good opportunity for many entrepreneurs to turn the margin screw. The chance of repeating this process or continuing it to the same extent may be seen as difficult. After all, inflation rates are slowly decreasing and this is not only due to the easing of energy prices, but also because the rapid and strong interest rate hikes by central banks are slowly reaching the real economy. The result is lower demand, which should subsequently lead to less price pressure. Thanks to stable labour markets in both the United States and the Eurozone, consumption is still keeping the economy going. Many analysts do not dispute that the coming months will bring a weaker economic environment. The extent of the slowdown is still a matter of debate. We are more on the side of the optimists on this point and do not expect a hard landing in the sense of a significant recession.

The good news is that an economy has to be strong for central banks to raise interest rates. If there were pronounced concerns about the future economic situation, interest rate cuts would be the order of the day. This is what the Chinese economy is currently experiencing, where the central bank has again lowered a key interest rate. The real estate issue is still a looming risk. Less relevant in the short term but structurally exciting is also the fact that some figures already show a change in international interest in China. Foreign direct investment is decreasing, the trend towards outsourcing to China seems to be waning, at least for the time being.

It is still difficult to assess at the moment whether a turnaround is actually in the offing on the markets in the USA and Europe. The fact is that investor sentiment has deteriorated somewhat and this is directly reflected in the performance of the stock markets.

world equity index in euro 5 year performance

Disclaimer

This information is intended to provide a general overview of current market data and market developments and does not constitute a direct or indirect recommendation for a particular investment strategy in the sense of a financial analysis, or a recommendation to buy or sell financial instruments.
When investing in securities, price fluctuations due to market changes are possible at any time. Analysts' opinions, market opinions Performance data with reference to the past do not allow reliable conclusions to be drawn about future results.

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