DAX before record level – what now?

The less dynamic global economy is weighing on domestic exports. The so important automotive industry is undergoing long-term structural change – with an uncertain outcome – and many companies in the DAX are still struggling with homemade problems. Trend themes in technology, the Internet and other sectors are being driven forward in the USA and China, not in Germany.
No wonder that the soon to be highest level in DAX history feels somewhat wrong. After all, the profits of DAX companies have been falling for a good three years.

Without wanting to get close to the guarantors of success in the index (SAP, Allianz, Adidas or Siemens), who were able to more than compensate for the price losses of the „underperformers“: In fact, a significant part of the DAX upturn is not due to the „sexiness“ of the index companies, but rather to the fact that the DAX is a „total return“ index.
In addition, equity investments, unlike bonds, still generate significant returns. A good seven percent is the profit yield of DAX companies, measured by the ratio of net profits to prices. Shareholders are entitled to these profits. Four percentage points are reinvested by the companies in their own business, the rest ends up in the form of dividend payments as income on the investors‘ account. By contrast, investors currently have to add 20 euros each year when investing in German government bonds if they previously invested 1,000 euros. Shares remain attractive in the long-term investment (price fluctuations must of course be withstood) compared to other asset classes, despite the good price gains already achieved.

Our year-end forecasts for the DAX and Euro Stoxx 50 for 2020 were exceeded early on in January of the new year. This can happen quickly, as our forecast was based on a rise potential of only five percent when first published in October 2019. If the DAX rises significantly more strongly than the historical average for a few months, an index forecast quickly becomes a waste of time. Even though investors rarely complain to us if they have earned more than forecast.

The domestic stock market is 19 percent too expensive by historical standards, which has only occurred during two further periods in the past 20 years.
Numerous studies and the „track record“ of successful investors have shown that successful timing on the stock market is not feasible for most investors. It is therefore usually better to align one’s investment strategy with the valuation level of shares or to buy continuously with monthly savings rates. If one applies the valuation concept to stock markets, they are now overvalued in a historical context.
This is particularly true for the USA: the valuation of the S&P 500 is 22% above the historical average on a P/E ratio basis, while the P/E ratio is 46%. Only during the dotcom bubble was the US market more expensive than today. It makes no sense to go „all-in“ on the stock market just to escape the interest rate depression in bonds.

Because market sentiment is very positive in addition to valuation, investors would do well to lower their short-term expectations for stock market returns.

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