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Equity Markets: The mood is worsening, the warnings are getting louder: is there a crash to be announced?

After another downward slide, triggered by a very weak Wall Street, German equity markets are initially in a position to recover today. However, the Dax once again slipped below 14,000 points. The sentiment on the markets remains characterized by concerns, currently there is little positive stimulus for the future in the short and medium term. “The downward trend is still intact and there is still no way to stop us on the way down,” writes analyst Christoph Geyer among others. However, the stock market turnover in the setback phase does not yet speak of a real sell-off. Landesbank Helaba says: “The uncertainty, mainly due to the energy supply from Russia, continues.”

Deutsche Bank outlines a more severe recession scenario

The toxic cocktail of inflation, rising interest rates, supply bottlenecks and the war in Ukraine are highlighting the danger of a recession and the alarms of international analysts are growing stronger. The US division of Deutsche Bank, which was one of the first banks to issue a recession warning this year, has again tightened its forecasts. While the bank’s official request remains for a “mild” recession until the end of next year, most bank analysts believe a deeper recession is needed to stave off inflation.

Developments such as climate change or a reversal of globalization, which were already underway before the corona pandemic, are contributing to the development of inflation and, according to the bank, could still cause unpleasant surprises in the further development of inflation. Add to this an inflationary psychology that changes radically, according to the bank, with companies willing to pass on cost increases and buyers willing to accept them. Given this idea, even an aggressive response from the US Federal Reserve may not be enough.

“Our home vision is for a mild US recession, which means a few quarters of negative growth and a 1 to 1.5 percentage point increase in unemployment,” Peter Hooper, global manager, told Marketwatch industry portal of economic research at Deutsche Bank. “A severe recession, which we experienced in 2008 and the early 1980s, is a completely different level: something that lasts a year, a year and a half and leads to a 5-6 percentage point increase in unemployment. The recession we anticipate in this alternative risk scenario is somewhere in between: something that will last for several quarters, with a significant contraction in GDP and an increase in unemployment of 3 percentage points, but enough to reverse the psychology of inflation “, says the analyst.

Morgan Stanley: Stocks are currently expensive despite inflation

Inflation can usually be a boon to stocks, as companies pass higher prices on to their customers, which in turn means higher revenues. Furthermore, stocks offer an alternative to park capital when money is devalued. However, analysts at Bank Morgan Stanley do not see a good environment for equities in the current inflationary environment, as the relationship between stock prices and corporate earnings is still a long way off. The broad S&P 500 market index is still valued 19 times earnings forward, according to banking analysts, which makes valuing the stock market expensive despite inflation.

“The implication is that inflation-adjusted equity earnings returns have never been lower,” Morgan Stanley chief investment officer Lisa Shalett said in a statement Monday. “This situation contributed to the collapse of the equity risk premium.” The average dividend yield per share of the S&P 500 is around 1.4%, well below current US inflation. That said, stocks seem less attractive as an investor due to the additional risk associated with buying and holding stock in the company in the current environment. In light of this, the current performance of the US market is still relatively good, according to Morgan Stanley analysts, as the majority of investors still seem to believe that inflation can soon be kept in check, that corporate earnings will continue to improve. despite headwinds they are proving resilient and that US equities continue to be seen as the best investment choice.

However, this is partly wishful thinking, according to Lisa Shalett. Morgan Stanley’s investment committee “is less confident, believing that the risks associated with real interest rates, valuations, earnings, market liquidity, inflation and, more recently, the strong US dollar are worth it. reduce prices “.

More recently, Michael Howell, chief executive of CrossBorder Capital and market liquidity expert, also outlined a scenario in which he sees another 20% downside for US equity markets. Read more here.

Don’t ignore the warning signs

The stock market has its own laws and often the opposite of what the market expects happens. Therefore, despite the overwhelming array of problems that currently paint a bleak future for the markets in the coming months, it is impossible to predict whether further downward pressure will come or even the worst will be discounted at this level. However, as an investor, you shouldn’t turn a blind eye to the various warning signs and you should adapt your investment strategy accordingly. Getting defensive now and being prepared when in doubt definitely seems to be better advice at the moment than getting upset about missed price gains later on.

A wide diversification, even beyond equities, as well as a solid cash reserve – despite inflation – to be liquid and to be able to react quickly is currently the best advice that can be given in light of the various uncertainties in the market.

onvista editors with material from dpa-AFX

Title photo: MaxxiGo / Shutterstock.com

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