Wednesday, December 1st, 2021
Fear of Omikron and a turnaround in interest rates
Crash or respite on the stock market?
From Max Borowski
Massive new corona restrictions are imminent in many countries. At the same time, inflation is rising and with it the risk that the central banks will turn off the money tap. The Dax has suffered heavy losses in the past few days. Is this the beginning of the end of the rally?
It is an explosive mixture for the stock markets: In many countries, massive new corona restrictions and even strict lockdowns are imminent. With Omikron, a previously unpredictable virus variant has emerged. At the same time, inflation is rising and with it the likelihood that the central banks will have to tighten monetary policy and reduce the supply of liquidity for the financial markets. The Dax literally slipped in the past week and has continued to fall in height in the past few days. Is this the beginning of the end of the latest stock market boom? Are we facing a significant correction, a bear market, or does the Omikron fright just provide a breathing space that investors can use to top up their portfolio cheaply? Several arguments are put forward for both possibilities.
The bear arguments:
The interest rate turnaround is coming
The head of the US Federal Reserve, Jerome Powell, has warned of the risk of sustained high inflation more clearly than ever before during the pandemic. The American monetary authorities are ready to accelerate the tapering, the scaling back of their multi-billion dollar bond purchases. Interest rate hikes are also conceivable earlier than previously expected. Extremely cheap central bank money has been the most important fuel for the stock exchanges in recent years. This could soon be over in the USA, by far the most important stock market.
An economic downturn threatens
Omikron makes it clear: An end to the Corona crisis is not in sight. Not only new lockdowns in Europe, but above all drastic measures in China are once again paralyzing parts of the global value chain from the factories to the end consumers. The latest wave of infections in Germany and other countries is hitting an economy that is already battered and has only just fought its way out of the crisis and is already being slowed down by delivery bottlenecks in almost all areas. Many economic research institutes have already revised their growth forecasts for this year downwards significantly in the past few weeks and months. When the economy isn’t going, most publicly traded companies make less money. Current share prices would fall.
The rating is already way too high
One of the largest investors in the world, the head of the Allianz group Oliver Bäte, recently spoke of an “irrational exaggeration” on the stock exchanges. Above all, the extremely high prices of some technology and auto companies are not justified by economic facts. The most prominent example is the auto company Tesla, which is currently valued at 1.15 trillion dollars on the stock exchange. That is a price-earnings ratio of 374. For comparison: At Bätes Allianz it is just below 10. The Buffett indicator named after investment guru Warren Buffett shows that the price level on the entire stock market is very high, especially in the USA: The At 270 percent, the market value of all US stocks is higher than ever before compared to American economic output.
The economic upturn has only been postponed
Many institutes have scaled down their growth forecasts for this year significantly. At the same time, however, many have improved their outlook for the coming year. Many consumers in Germany and other countries are still sitting on the money that they saved due to a lack of spending options during the lockdowns. Many industrial companies produce with the handbrake on due to delivery problems for primary products, but their order books are full. As soon as the pandemic situation and the supply chain chaos relax, a strong upswing could set in.
Corporate profits flow
Even during the subdued upswing in recent months and despite all the complaints about stagnant supply chains, many corporations have managed to generate decent profits. There are also corona winners from the technology and medical sectors. From some of the industries most severely affected by the pandemic and the restrictions resulting from it, such as gastronomy, only a few companies are listed on the stock exchange, especially in Germany. This also applies to stationary retail. In contrast, investors can participate in the boom in online retailers and delivery services with shares in Zalando, Delevery Hero and many others. According to capital market expert Andreas Beck, the negative consequences of new lockdowns are already factored into the current price level.
Investment pressure remains high
Even if the Fed turns back its bond purchases a little, a lot of capital will continue to circulate in the market looking for high-yield investment opportunities. The ECB is likely to end its Corona emergency program in the foreseeable future, but not the bond purchases as a whole. The interest rate turnaround is likely to take longer in the euro area than in the USA. In addition, the central banks are nowhere near the only ones pumping money into the market. The wealth of mega-rich investors has exploded in the pandemic. And the middle class has saved more than before and is investing more of it in the stock market. This applies to Germany, but especially also to the USA, where small investors with their savings have more influence than ever on the stock market. In the long term, aging societies in industrialized and emerging countries save more money that has to be invested.
Equities remain attractive in times of inflation
On the one hand, inflation is a problem for many companies. On the other hand, stocks also offer some protection against inflation. When currencies lose their purchasing power, real assets such as real estate, but also company shares, tend to become more expensive.
Old evaluation standards are becoming less important
Warren Buffett has been extremely reluctant to invest in the stock market for years because, according to his indicator, he considers prices to be excessive. With that he missed some price gains. Other investors, such as Star fund manager Cathy Woods, have long pointed out that the traditional valuation standards for highly innovative companies like Tesla are not meaningful. According to Woods, companies that, like Amazon once did, develop completely new business models in online trading can grow exponentially and make gigantic profits in the future. With the same formulas as with traditional industrial groups that generate stable returns over decades without changing their business significantly, the value of such technology companies cannot be sensibly measured.