Sentiment in German industry has deteriorated further. After peaking in March 2021, business expectations in the manufacturing sector have now fallen for the fifth time in a row. And export expectations also fell significantly. In short, the summer euphoria has completely evaporated. On the ifo Business Cycle Clock, the German economy is now on the verge of leaving the boom sector and entering the cooling segment (chart). This confirms the risk of a turnaround in the economy and underpins our decision to set the business cycle component - one of three factors in the private-wealth stock market indicator - to "red".

We explained the logic to you a month ago. Supply bottlenecks continue to massively disrupt production. Our fears expressed at the time that companies would have to register for short-time work in the worst-case scenario with full order books now seem to be confirmed. In addition, the sharp rise in input prices is making costing more difficult. If it is not possible to pass on the higher input costs to the sales prices, the profit margin suffers.

What is new is that, according to the Ifo Institute, companies are now also reporting weaker demand.

For investors, this mix could become a problem. Investor expectations in equity markets for corporate earnings growth in Q3 and Q4 2021 are very high. This is reflected in record stock market prices. If they were to be disappointed, there could be severe corrections.

How severe these will be will depend on the extent to which investors are prepared to look "over the valley" of supply bottlenecks. After all, a calming of the situation in 2022 is entirely plausible. Moreover, promising corporate investments are in short supply. At any rate, the need of investors to buy is currently evidently much stronger than the desire of invested investors to sell. This is (still) stabilizing prices.

Last but not least, the capital market seismograph continues to signal a positive environment. "The probability for a calm positive market development (green) and a positive turbulent market (yellow) is still around 99 percent cumulatively. The probability for a turbulent negative market (red) is therefore irrelevant", informs Oliver Schlick, Managing Director of Secaro GmbH, who regularly calculates the seismograph and links it to investment recommendations. He derives the recommendation "significant overweighting" from this.

For the private-wealth stock market indicator and its three factors, this means: First, although the valuation of the German stock market is ambitious, it is not excessive in a persistently low interest rate environment. The economic sell signal nevertheless reduces the equity allocation to between 45 and 75 percent of the capital earmarked for equities. The seismograph's very positive assessment lifts the model's suggested equity allocation to the upper end of the corridor at 75 percent.

After more than a year of overweighting equities, the private-wealth stock market indicator took its foot off the gas four weeks ago. That remains the case this month. The shaky economic situation increases the likelihood of a turbulent fall. We'd like to keep some powder dry for that eventuality.

Stay healthy,

yours

Klaus Meitinger

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