When the party is at its best, they say, you should leave. The equity markets have been doing well for months, and the private-wealth stock market indicator is fully on board with an overweight in equities. But now the economic component of the model is giving a sell signal. Is it time to take profits?

Let's take a closer look at the latest ifo business climate. It is true that sentiment in the German economy improved further overall in June. However, expectations in the industrial sector, which are decisive for the stock market indicator, fell for the third time in a row. They had already peaked in March at 25.2 points.

In the past, such a development often signaled a turnaround in the economy. Business expectations frequently peaked at values between 20 and 30 points. After that, the business situation clouded over, growth slowed considerably and corporate earnings declined. Because analysts' optimistic forecasts were now missed by a wide margin, there was turbulence on the stock markets.

That's why the private-wealth stock market indicator actually calls for a significant reduction in equity exposure in such a situation.

Actually. Because this time the decline in the expectations component in the industrial sector is not - as in normal economic cycles - due to a drop in demand. The industrial leaders are primarily worried about problems on the supply side - be it supply bottlenecks or, as a consequence, sharply higher input prices. The economists at the ifo Institute themselves therefore advise not to overestimate the data just yet.

The current difficulties on the supply side are clearly the aftermath of the pandemic. Capacities were initially cut everywhere and cannot now be adjusted quickly enough to meet the dynamically rising demand of a global economy in catch-up mode. Supply and supply chains should normalise in the coming months. Then business leaders should also become more optimistic again. Let's not forget: there is consensus among economists that the next twelve months will bring very strong, synchronized global economic growth. If this is even close to being true, business expectations in the industrial sector should also improve again.

We know, of course, that the rule is the rule. A three-fold decline in expectations undoubtedly signals higher economic risks. And we also know that the most expensive four words in the stock market are, "This time is different."

Nevertheless, we see the current weakness in business expectations as a special situation and are waiting to see if the downtrend really continues in the coming month before making any changes to what has been a very aggressive equity positioning.

This approach is also in line with the results of the capital market seismograph. The short-term signal for equity allocation remains unreservedly positive. The probability of a calm, upward market trend (green) now ranges between 80 and 90 percent. Yellow - a positive-turbulent market - still plays a small role. But the probability for a turbulent negative market (red) is close to zero. "The recommendation remains: Significant overweighting," summarizes Oliver Schlick, who as managing director of Secaro GmbH regularly calculates the probabilities of the seismograph and links them to investment recommendations.

Conclusion:

Because we deliberately suspend the sell signal of the economic component in the private-wealth stock market indicator due to the special situation described, the suggested equity quota remains at 110 percent of the capital earmarked for equity investment.

Have a relaxing summer,

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.