Dow Jones and other indices set new records: time for the five most important questions and answers

Many stock market indices are trading higher at the end of January than the majority of analysts expected in their forecasts for the end of 2017. The DAX is also already trading close to the DZ BANK year-end forecast. What further developments can be expected on the stock markets in 2017?

The election of Donald Trump as President boosted the stock markets, contrary to expectations. We expect that the DAX could climb close to its record high in the spring. Thereafter, however, disappointment could set in as the Trump effect declines in the USA and focus in Europe shifts to looming political events, for example the elections in the Netherlands and France. The political environment indicates the potential for price fluctuations with a slight increase overall by the end of the year.

What is driving the current upwards momentum?

The true reason behind the upwards momentum on the stock exchanges is not that the markets expect U.S. public spending to increase under President Trump. There is much more to it than that: the triple play between the three major pillars of the U.S. economy (finance, energy and technology) finally seems promising again. Thanks to the significant increase in the price of oil (+25% since Trump’s election victory) as well as substantial yield increases in the USA (+60bp for 10Y U.S. Treasuries since November) the first two sectors named above will flourish in 2017 and catch up with a technology sector which is already bursting with strength. Trump’s presidency will, following three years of stagnation, begin with significant profit increases for U.S. corporations. And this without the new administration having to lift a finger so far. Barack Obama, in contrast, was forced to begin his presidency in the weakest economic environment since the market crash 1973/1974.

Is the current stock market rally fundamentally justified?

The prospects for global economic gains in 2017/18 are positive. Among other things, the economies of emerging countries will gain momentum again. Should profits recover in the USA as described above, increases of 12% for both 2017 and 2018 are likely there. DAX companies are also performing better than ever before and are likely to post record profits, too. The valuation of the stock markets would certainly be justified if these profit gains were actually realised, as stock market fundamentals would subsequently move in line with these high valuations. However, considerable improvements have already been priced into valuations as they currently stand, which speaks against the possibility of share prices rising significantly further. The financial markets are expensive right now.

What will the DAX level be at year-end? What kind of fluctuations should investors expect up to then?

 Current developments are exaggerated. It would be a mistake to take the positive price performance of recent weeks as a new standard and continue the story in this way. From the past we know that upturns on the stock market are never linear. The one-way street for bond and share price developments is coming to an end, the political landscape points to higher price fluctuations. The DAX should be around 12,000 points at the end of this year.

Should those who have stood back so far invest at the current level?

 In general, it is never a good idea to enter the stock market for the first time when it is trading at a high level. The upturn since the financial crisis has been ongoing for eight years now. Corrections are possible at all times, especially after a prolonged upturn.

The political landscape points to higher price fluctuations. Investors should use these. That means taking the opportunity to invest at lower prices. After all, German companies are far more crisis-resistant than price fluctuations would suggest.

Anyone who doesn’t want to worry about timing it right on the stock market could make use of a fund savings plan or products with a buffer. The DAX has yielded almost 9% p.a. despite all the crises. What more do you want? Cash and insurance policies are not the answer, they do not “move in time” with the economic rhythms of Germany and the world.

 

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