New liquidity from central bank and government

Not only the latest economic data can exceed investors’ expectations, the Federal Government’s economic stimulus package worth 130 billion euros and the expansion of bond purchases by the European Central Bank (ECB) as part of the Pandemic Emergency Program (PEPP) by 600 billion to now 1.35 trillion euros were above the forecasts (100 billion and 500 billion euros respectively).

That the PEPP purchases were extended until at least June 2021 and the reinvestments continued until at least the end of 2022 was just the cherry on the cake. Because ultimately the volume of purchases remains the same, it is only stretched in time.

The ECB cited the decline in inflation and inflation expectations as the main reason for the renewed monetary easing (see also table below). The PEPP purchases will continue until the coronavirus crisis is over, the statement says. And with the other purchase programs, the ECB maintained the previous rate, as did key interest rates. This will continue to be the case until the price development has reached the ECB’s goal. What can still drive the stock markets now?

Now you have to ask yourself slowly what can actually drive the share prices. Certainly, some recently adopted measures will only come into force and will then take effect. This effect will lead to a recovery of the economy, particularly through consumption, which will lead to higher turnover among companies and ultimately profit. But this is already priced in the stock markets. Fundamentally, they have long been valued as ambitious.

The hope of a quick economic recovery is already so high that improving economic data only confirm this, but can hardly fuel it anymore. And the central banks may have slowly run out of powder or at least wait and see how the measures taken work. It can therefore be assumed that no more refills will be made, if at all. This is especially true for the ECB.EZB after yesterday: Even at the end of 2022 not at pre-crisis level

So there is only the principle “the bull market feeds the bull market”, according to which investors can still act. But I wouldn’t put my money solely on the principle of hope. Especially since there is growing evidence that investors’ hopes, especially for a rapid economic recovery, will not be fulfilled to the extent that they are already anticipated by rising share prices.

For example, the ECB’s current projections assume that the gross domestic product of the euro zone will shrink by 8.7% in the current year. It should then recover by 5.2% in 2021 and increase by 3.3% in 2022.

Economic expectations of the European Central Bank (ECB)

(Source: European Central Bank)

Let’s do the math: if GDP falls by 8.7% this year, it ends up at 91.30% of the previous year’s level. If it recovers by 5.2% in 2021, this makes a new value of 96.05%. And if 20% is added in 2022, then GDP will ultimately stand at 99.22% of the 2019 value.

ECB scenarios for euro area GDP

(Source: European Central Bank)

So even at the end of 2022, according to the expectations of the ECB (blue line in the chart), we will not reach the level we were at before the crisis: lost profits and loans to be repaid

This is also due to the fact that many companies will have no catch-up effects. The sales and profits not achieved in the past weeks and months are partially lost forever. Even where catch-up effects are to be expected, such as currently at Adidas in China, one can only be optimistic to a limited extent. Because many companies also have to repay loans taken out due to the crisis before they can return to the bottom line as before the crisis, at Adidas (3 billion euros) and at many other companies. The stock markets are currently almost as high as they were before the crisis, especially the Nasdaq 100, even though we are still in the middle of the crisis.

You don’t have to be permanently invested in the market

Against this background, it can currently make sense to simply dry his sheep, i.e. reduce investments and take profits (see below) and keep cash. After all, you don’t always have to be fully invested in the market, even if you leave a few percentage points in profit. Because on the stock exchange it is always important to invest in a reasonable risk-reward ratio. And with most stocks, the risk that they are now significantly overvalued and that prices are completely overbought is simply significantly higher than the chance that the price increase will simply continue without strong countermovements.

The habituation effect can also set in with positive news

It should also be noted that the habituation effect applies not only to negative developments, but also to positive ones. It has already been seen that the latest economic data is better than the previous one. And it is expected that this will also be the case in the future. If this is confirmed, it is no longer a surprise. This could lead to an increase in the “sell the facts” effect instead of leaps of joy.

I wish you much success with your investment
Sven Weisenhaus


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