- The price slide in the stock market we have seen over the last few days is clearly an overreaction. An interest-rate shock or even a recession are highly improbable.
- Given that the DAX and the other indices all climbed in 14 (!) of the last 15 months, a swing back the other way was long overdue.
- The economic picture and interest-rate outlook remain unchanged. Forecasts for the DAX and the Euro Stoxx 50 confirmed (14,000 / 4,000 points). US stock market should suffer more than the more favourably priced DAX (PER 2019e 11.8).
In the strongest sell-off since 2016, stock markets the world over lost a lot of ground yesterday. In particular, prices on the US exchanges fell by far the most. Even if the sheer scale of the price losses initially seemed unsettling after the long duration of the rally, in the final instance the correction was not so surprising. Since Donald Trump’s election, in other words during the so-called “Trump rally”, at their best the Dow Jones and Nasdaq-100 both soared almost 50%, with the S&P 500 surging 40% and even the DAX gaining a third – there was no way such a pace could be maintained in the long run. Almost all the world’s major equity indices were of late clearly in expensive terrain and last week we were already expecting a pending phase of consolidation.
There are no grounds to panic: The S&P 500 has since the late 1960s seen a correction on average at least once a year, with the median decrease being 13%. The DAX has tended to see interim slumps during the year that are even more pronounced at 18%. Prices then recovered over the next few months, with only about every eighth correction leading to a real “bear market”.
Investors who panic and sell during a correction as a rule book high real losses and also run the risk of missing out on the subsequent recovery. Alongside these “seasonal” corrections, from time to time there are real crashes when an economic downturn (“recession”) coincides with a bubble on the stock market or in the real economy bursting. In the last 100 years of the capital markets, this occurred in the 1930s (‘speculation on loans’), 1973-4 (the era of the “Nifty Fifty” stocks and the oil price shock/recession), 1999-2000 (the dotcom bubble) and in 2008-9 (US housing market bubble). During the latter two crashes, prices fell roughly 50% and in the 1930s actually by over 80%.
We consider there to be only a slim probability of an economic recession in the US, although we feel there is a greater possibility that the US economy will “overheat”. This would lead to a higher inflation rate, triggered among other things by higher wage increases for employees, and would indicate that a more restrictive approach by the Fed and higher key lending rates are on the cards. Many market players are frightened of precisely this scenario at present.
Such inflationary trends would, however, be weakened by the impact of globalisation and structural trends, amongst others the threat to jobs posed by automation. A glance back in time shows that stock markets tend to drift into weak phases as of a point when US yields are at a level of 4-5 percent. We do not expect to see such a level in the next few years.
Nevertheless, the US stock indices are likely to remain under pressure initially over the next few days, as the market valuation has climbed too far from the historical average and the gap to the technical averages, e.g., the 200-day line, now seems too exaggerated.
The German stock market has entered troubled waters in the wake of the latest consolidation on the US stock market. Compared to its all-time high, the DAX has shed a good 1,000 points. At the same time, analysts in Germany are raising their profit estimates for the DAX-listed companies for 2018-9. On the basis of the most recent consensus estimates for 2018 and 2019, the DAX is currently valued at a PER of 12.9 or 11.9. A PER of 11.9, which spells an earnings yield of 8.4% (the inverse of the PER), constitutes an attractive entry level, historically speaking. In our virtual DZ BANK model portfolio we yesterday raised the share of equities by 14 percentage points.