Publication date: August 8, 2024
What is going on in the financial markets?
In our weekly research, we have been writing for weeks that after reaching the AEX's price target at 935, the stretch is gone and the AEX could correct to 874. The market always exaggerates and has extended the previous ride up to 948 and the correction has now even touched 840 in the panic situation.
Read our view of August 2, 2024
Read our July 26, 2024 vision here
What changed?
The system of central banks in the U.S., the Federal Reserve, aims to curb inflation and ensure a healthy labor market. For a long time, inflation was too high and the labor market was healthy. Therefore, the Fed has consistently raised interest rates to limit inflation.
During that time, disappointing macroeconomic data were good news for equity markets because if the economy cools down quietly then there is room for interest rate cuts. And equity investors love that. That interest rate cut in the U.S. was always announced but was not properly followed through by the Fed because of inflation that just did not want to fall hard. But as long as the labor market is healthy, the FED will continue the interest rate cuts as soon as there is little room for them.
Friday the monthly labor figures from the U.S. were announced. These were disappointing. The period of relatively high interest rates is taking its toll because the economy seems to be heading for a so-called hard landing. Bad news is therefore interpreted by the market as really bad news and no longer as a signal to lower interest rates.
Based on a month of disappointing labor figures, sentiment in the media and among many investors is turning. We expect the Fed to begin to pace rate cuts to give the economy a boost to get out of this temporary slump. As far as we are concerned, the labor figures are an opportunity to let a lot of air out of the tightly inflated stock prices.
Trend up is not finished yet
We use the leading-wide stock index in the U.S., the S&P500. Above is the chart for the past five years. The current upward trend started after the panic selling due to the breakout of COVID-19 in 2020. It has only been over four years since ASML was at € 175. Recently the share price ticked up to €1,000! This is just one example but it shows that panic moments in an uptrend are the perfect buying moments. That is of all times.
You can also see the first correction in the trend in 2022. Prompted by panic because the war in Ukraine started and remember gas prices? Inflation went sky-high and stock markets once again dropped about 30%. The trend then continued and the increases speak for themselves.
Correction continues
The most likely scenario is that equity markets are in the process of a larger correction that will approach the magnitude of the 2022 correction. It is not unlikely that, based on recessionary fears that remain for a while, the markets could fall about 15% from the top. That's a very common move after a rise of tens of percent.
As you can see from the chart above, last week's decline is nothing more than a possible start to a further correction.
What is the outlook for the equity markets?
Perfect buying moments are coming as far as we are concerned but just a little more patience. Just enjoy the summer period for a while because after that we can buy at nice levels.
Concretely, our algorithm expects the AEX to fall to around 810-800. The Dow Jones to around 35,000 and the Nasdaq may continue back to 16,500 and possibly even 15,500. The S&P may also return to the 4,800 points. In all cases, this means another decline of about 10% from current levels. At that point, we will have had the fear period and the markets will be reasonably priced again. The time to strike!
The trend is up and the price targets are sharply higher. The algorithm expects the AEX to rise above 1,000 points after the correction. The popular ASML also has a price target of substantially above €1,000. The stock has already been punished about 30% in recent weeks and can go back a little further to leave the panic behind around the € 600 level.
Do you have any stock market nerds in your portfolio such as Just Eat Takeaway and Air France-KLM?
These stocks are in the € 10-€ 12 (Just Eat) and € 6-€ 8 (Air France) zone we indicated earlier. Both stocks are very popular and are at historically low levels. In particular, Just Eat TakeAway has a lot of support at €10 and may well start to benefit from the next rise within the large uptrend in equity markets.
Conclusion
Just be patient. Anxiety reigns and will persist for several more weeks. This creates a healthy and temporary correction in equity markets. The trend is up, making panic selling perfect buying opportunities to build up your equity portfolio for the long term at a comfortable level.
Success!
Disclaimer: Investing involves risk. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. They are therefore for educational purposes only.