Not a good prospect for the Dow Jones | EUROtoday

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SRising rates of interest are poison for shares: An outdated touring salesman took me apart one morning at the Dresdner Bank to emphatically inform me precisely this one sentence. “Rising interest rates are poison for stocks!”

The connections had been already clear to me. The greater the returns, the higher their competitors with shares, the dearer investments develop into, and so forth. However, in the early years of my analyst life, I paid little consideration to something that may very well be related to rates of interest and bonds.

For me, the bond markets had been boring at finest and their identify mentioned all of it: one thing for retirement. I’m nonetheless very grateful to my colleague at the time for urging me to alter my perspective.

Because this one scene, this one sentence stays with me to today. When creating an summary evaluation, normally over a weekend in a quiet room, there may be nearly all the time only one query at the very starting: “Will interest rates rise permanently?”

Alarm bells are ringing

If the reply is, with good purpose, “No!”, I’m relieved to show to my favourite analytical discipline, shares. But if there may be even a conditional “Yes!” in the room, I develop into considerate. That’s why alarm bells rang for me in the summer season of 2000 after I first noticed high-quality, long-term efficient pattern reversal alerts on the bond markets. This remark needed to have fast penalties – and it did: Since then, my long-term, and never essentially all the time medium-term, forecasts for each the bond and inventory markets have been characterised by skepticism. “Rising interest rates are poison for stocks!” To put it briefly: This skepticism can not change a lot immediately. “My” expertise nonetheless permits little else: I’ve to proceed the upward pattern in yields and the downward pattern in bond costs on either side of the Atlantic. The state of affairs on the inventory markets was and is extra thrilling. You have proven your self to be very immune to every kind of adversity over the previous three years – even when it got here at the expense of your nerves. But that too could now be over.

The Dow Jones chart proven exhibits two crucial technical moments: On the one hand, its upward pattern since the Corona disaster in the spring of 2020 has solely simply led to everlasting looking grounds, and on the different hand, the medium-term oriented indicator proven has a “falling” sign generated. Taken on their very own, each alerts would not be so unhealthy. That occurs typically. But as a result of these or comparable developments can be noticed on the European markets and particularly right here, you’ll in all probability solely see sustained, vital will increase in Dow costs in the foreseeable future when you flip your chart 180 levels. Prices under 30,000 factors are something however out of the world with a view to the subsequent few months.

Skepticism confirmed

What is especially irritating to me, and at the identical time confirms my skepticism, are headlines that see one thing like an autumn or year-end rally simply round the nook, typically just about the seasonally statistically very good fourth quarter, together with a comparability to autumn 2022. They ignore, for instance, that the temper this 12 months is totally totally different than a 12 months in the past. At that point, fears of a Russian use of nuclear weapons in Ukraine had been rampant, and that alone made ideas of a rally, no matter the identify, nearly unattainable. The inventory markets had been in a position to rapidly backside out and achieve considerably: the worse the temper, the higher the costs. But the reverse additionally applies – and that is what we’re in all probability coping with at the second. The headlines talked about at the starting of this part are an eloquent instance.

Something else is added. This requires a nearer take a look at the medium-term oriented indicator displayed under the Dow chart: In October 2022, it generated a robust “rising” sign with a “positive divergence”. He was not in a position to perceive the new low of the Dow Jones in areas round 28,700 factors, however had already turned upwards once more. The distinction to the present state of affairs may hardly be extra stark: the identical indicator not solely didn’t generate a “rising” sign coupled with a “positive divergence”, but additionally generated its clean counterpart, a “falling” sign together with a “negative divergence”. , added. So we’re at present not coping with a new robust “rise” sign, however with a new robust “fall” sign. There is not any different approach: optimism is misplaced – in all probability.

Back to the bond markets: someplace round 5.5 %, the long-term upward pattern for US 30-year bond yields could take a main break and enter a correction section. More on this in two weeks – as a result of this may be good information for the inventory markets.

Wieland Staud is managing director of Staud Research GmbH in Bad Homburg.