The past stock exchange year was marked by severe share-price fluctuations that ended up in heavy losses in the final quarter. When prices fall unexpectedly steeply, then a significant recovery usually follows just as rapidly. This is also the case in 2019: Since the beginning of the year the S&P 500 has risen 12% and the Nasdaq 14% – the best start on US stock exchanges for 44 years. The DAX also rose 9%. The best share-price performance was delivered by Chinese shares, with the CSI 300 climbing 22%.
The economy in the USA remains pivotal for the market’s future performance. There are many critical voices that believe the US economy will soon be heading for recession. The main argument here is that we have been going through a phase of expansion for ten consecutive years, so the time has come for the USA to go into recession. This could primarily be read off from the increasing capital market yields and an inverse yield curve. Admittedly, there is an increasing number of cracks in the positive economic indicators, but so far the economy still remains on solid foundations.
The question is whether shares are too expensive or not. We believe this is not yet the case. With a current P/E of 14.9 related to FY 2020 the valuation of the US market, measured in terms of the S&P 500, is on a par with the long-standing average of 15. At the same time the US equity market is more heavily dominated than ever by technology stocks – they account for 26% of the S&P 500 index’s capitalisation. They are growing far faster than other companies in the USA and therefore together with bank stocks provide the basis for rising corporate profits. In addition, the market is becoming increasingly aware that the US central bank will keep key rates very low for a very long time. This could lend the equity markets additional buoyancy.
For this reason, we do not consider it necessary to sell off equity holdings at a stroke. The Chinese equity markets have risen strongly, but Chinese shares’ valuation is by no means so exaggeratedly high that they urgently need to be sold. With respect to S&P 500, Euro Stoxx 50 and DAX share prices we still see some potential although our index forecasts for the end of 2019 are already in sight. The valuation of the Nasdaq 100 has increased somewhat recently, but the profitability of its heavyweights (Microsoft, Apple, Alphabet and Amazon) will probably increase yet further, not least thanks to the booming cloud business. Our DZ BANK Market Sentiment Barometer is still not indicating any exaggeratedly euphoric sentiment so there is still no reason for a large-scale withdrawal from the equity market. Only when the euphoria becomes too great is it time to sell. It will probably be some time yet before that happens.