Something is brewing: What's going on on the stock exchange?

Friday March 12th 2021

Something is brewing
What's going on on the stock exchange?

The stock exchanges apparently only know one direction at the moment: forward. Spurred on by the hope of a recovery in the corona crisis, stock markets are moving from one record to the next. But skeptics warn of a bubble.

As if unleashed, the stock markets are currently racing upwards. Record after record follows on many stock exchanges. The world's most famous stock market barometer – the American Dow Jones Industrial – now has around 32,400 points. At around 14,600 points, the leading German index, the Dax, is trending higher than ever before. The severe economic slump last year? To forget. Since the Corona crash almost exactly twelve months ago, the Dax has risen by three quarters. Although the economy has recovered, it is still a long way from returning to its former strength.

What exactly is driving the stock market?

The driving force behind optimism is the progress made with corona vaccinations. Investors are betting that the crisis will soon be over and that lockdowns will no longer be necessary, so that people can travel and shop freely again. At the same time, central banks and governments are pumping trillions into the economy to alleviate the financial consequences of the pandemic. Only in the middle of the week did the USA decide on a new economic stimulus package worth around 1.9 trillion US dollars (around 1.6 trillion euros). On Thursday, the European Central Bank announced that it would step up its pace even more in the second quarter as part of its essentially unchanged, billion-dollar bond emergency purchase program. The flood of cheap money from central banks in particular has provided fuel for the stock market for years.

How far is the stock rally going, and what are the optimists saying?

"A bull market has not died just because of old age," is a saying among stock market traders with a view to long phases of rising prices. Analyst Christian Kahler from DZ Bank believes the Dax will rise to 15,000 points by the end of the year. "The DAX companies got through the crisis year 2020 very well," the expert justifies his optimism. Profits have fallen much less than in previous recessions because of government stimulus programs.

What are the risks?

For Kahler, a "stable, predictable course of the corona pandemic" is the prerequisite for a sustainable recovery. He sees a risk in a conceivable significant deterioration due to virus mutations.

Apart from the worsening of the corona crisis, investors primarily fear a surprising rise in inflation. The mere expectation of an increasing rate of inflation had temporarily caused a bad mood at the end of February and beginning of March. Because rising interest rates make loans more expensive for companies and money as a whole, which can at least slow down economic growth. Alternatives to stocks, such as bonds and overnight or fixed-term deposits, are also becoming more attractive. A lot of money could therefore flow in this direction from the stock market.

What does all this mean for (private) investors?

Quite a few people fear that they have almost missed the stock market move and that they have to jump up quickly. Market expert Andreas Büchler from Index-Radar now sees the Dax between such a "buying panic" and overheating. After the steep rise in prices over the past few months, patience, which is advisable on the stock market, could pay off for now.

While short-term investors could cash in first, it may be worthwhile for medium-term investors to stick with it, says Büchler. After all, the upward trend is still intact. However, this does not rule out short-term setbacks. Therefore, the expert believes: "Fresh purchases could, however, be possible for the patient with a little luck at some point again at somewhat lower prices."

What do skeptics of the stock market rally say?

The only partially recovered economy may face a further setback, or at least slower growth, wrote star investor Jeremy Grantham, co-founder of the fund provider GMO, recently. In any case, the uncertainties are very great. Still, stock indices are much higher than they were before the crisis, when the economy was still looking good. In relation to actual corporate profits, shares were rarely valued higher than they are now. "The bull market that has been running since 2009 has finally developed into a full-fledged, epic bubble," Grantham sums up his point of view. He compares the development with the stock market hype before the Great Depression of 1929 and the dot-com frenzy at the turn of the millennium. But when such a bubble will burst is difficult to predict.