Dear Readers,

The mood on the German executive floors is becoming uncomfortable, writes the ifo Institute. In fact, the ifo business climate continued to decline in July. In industry, which we regard as a sentiment indicator for the global economy and the stock markets, the business climate indicator is even in free fall. Especially the export suffers (graphic 1).

Now that the prospects in the service sector and trade have also become noticeably gloomier, only construction remains the positive exception.
All in all, this means that the ifo economic clock is clearly in the downturn quadrant. The ifo traffic light remains red (Chart 3 and 4).

Whether the weakness in industry now spreads to the domestic economy depends primarily on the employment policies of companies. If massive redundancies were to occur, the economic downturn would have to be expected to worsen. The decision is still pending. According to the ifo Employment Barometer, the labour market in industry is weak. More companies are currently reporting that they want to reduce their headcount. Further recruitment is planned in the construction and services sectors. All in all, layoffs and new hires are still more or less balanced. But the risk increases.

On balance, it is quite possible that the German economy will show negative growth rates for the national product in the second and/or third quarter of 2019. This puts Germany on the brink of recession.

A month ago, we questioned whether investors' still ambitious earnings expectations of German industrial companies could be met in this situation. As feared, a whole series of downward profit revisions has now taken place. This will probably not change in the near future.

While the negative earnings outlook is weighing on share prices, support from central banks continues to have a positive impact. The Fed will cut interest rates this week, and the ECB has also announced expansionary measures. Whether this will be sufficient to positively influence the mood in the economy remains questionable. At the end of the day, corporate profits count.

For our short-term positioning on the stock market, we use data from the ifo Institute as well as the results of the capital market seismograph. Contrary to the German economic indicators, however, the capital market seismograph currently sees the investment world much more relaxed.

In the last month, the probability of a calm, positive stock market ("green, buy or hold") has risen again to 49 percent. The probability of a turbulent, volatile market with a positive trend ("yellow") is 29 percent. Particularly important: the probability of negative turbulence fell to 22 percent. "The probability for "favorable" markets (yellow or green) is now almost 80 percent. The positive basic tone for the market remains unbroken. Another decisive factor is that, in the very long term and according to the latest version of the ECB's strategy, an accommodative monetary policy can now be expected independently of the achievement of the inflation target of 2%. The interest rate cuts are coming - around the globe," comments Oliver Schlick and concludes: "A high weighting for the equity quota is derived from the values of the seismograph.

Conclusion:

The private-wealth stock market indicator has been out of the stock market since the end of February 2018. This was triggered by the three-fold decline in ifo business expectations in the industry and the simultaneous very high valuation of the stock markets.

Since then, the indicator has proposed a minimum weighting of equities of 0 - 30 percent of the individually planned equity component. In view of the worsening economic downturn, there is no reason to abandon this cautious stance. Based on the positive data from the capital market seismograph, a weighting of 30 percent is indicated within the corridor from zero to 30 percent.

yours

Klaus Meitinger

Note: Despite careful selection of sources, no liability can be accepted for the accuracy of the content. The information provided in private wealth is for information purposes only and does not constitute an invitation to buy or sell securities.