The market is in a sustained downtrend and there is little hope of a turnaround.
(Photo: Kostas Koufogiorgos)
One thing you can rely on in turbulent stock market times: prices fall as soon as companies warn their shareholders that profits will be lower than originally expected. That was almost always the case, even in earlier, good stock market times.
What is more surprising is that investors have hardly given any credit to positive company news that has been plentiful in recent weeks, such as from BASF, a stock that has recently suffered severely. This constellation does not bode well for the stock markets in the coming weeks.
Specifically, the following pattern was recently seen on the stock exchanges: On the day of the profit or sales warning, the share price of the respective company fell by an average of 6.5 percent, as the management consultancy EY calculated on the basis of 160 German listed companies. With an increased forecast, however, the share price rose by only 1.9 percent on the day of the report.
This difference is surprising at first glance. Finally, the conditions for reduced company forecasts are to be expected due to the Russian war of aggression in Ukraine, the associated sanctions and rising energy prices. The rising key interest rates make matters worse because higher interest rates make future investments and borrowing costs more expensive.
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Conversely, the conditions for rising company forecasts are poor in view of the gloomy global economic outlook. Nevertheless, many companies are making record profits and are even raising their forecasts for the full year, including Mercedes, Linde, Symrise and RWE in the Dax.
Courses hardly react to positives
However, the fact that prices often hardly react to this raises the suspicion that shares are still expensive overall. This is shown by the violent reactions to the almost expected bad news. The stock market has apparently not yet come to terms with the imminent negative development of the real economy – the news has not yet been priced in.
Conversely, the forecast increases sow doubt that the companies will actually deliver better results, as now predicted. Such doubts are quite justified, because the higher forecasts are almost always subject to reservations, as a look at the details shows.
Be it, as recently at BASF, that gas must not become scarce in the future. Be it, as almost all companies are pointing out, that the global economy is not drifting into recession and the war is not escalating.
All of these conditions are becoming a little less likely with each passing day in view of geopolitical developments, the upcoming cold season and the threat of a slowdown in the economy.
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The stock exchanges are apparently still in the process of sounding out a viable bottom. This process is probably not finished yet. Investors should therefore prepare for even lower prices.
No one knows if or when that point will be reached. But there are indications that investors should pay attention to: If bad news no longer triggers significant price losses, because apparently everyone has long been expecting it, the ground is prepared for a new bull market on the stock market.
That may well be in the midst of a severe recession. This was the case last time in the two springs of 2003 and 2009. Both times, stock prices around the world started to rise, despite a lot of bad news from companies and the broader economy.
However, we have not yet reached that point. In this respect, there is a lot to be said for the difficult times on the stock exchanges to continue.
More: The Dax is only apparently cheaply valued