Incalculable risks for investors.
There are a few ironclad rules when using capital market models. Never intervene manually in your model. And don't try to anticipate the evolution of input variables.
Extraordinary situations, however, require extraordinary measures. That's why today we'd like to give you a peek into the engine room of the private-wealth stock market model.
In the model, we use the ifo business expectations in German industry as an indicator of the impact of the economy on the stock market. If they deteriorate, this is an indication of an economic downturn with a corresponding negative impact on corporate earnings. If expectations improve, positive impetus from company earnings and rising share prices can be expected in the future. To establish a new trend, expectations must move in the new direction three times in succession.
Currently, this economic indicator is positive. A downward trend reversal would therefore be indicated by a decline in business expectations three times. This early warning function worked well in a normal business cycle. However, in extreme situations - pandemics or armed conflicts - it is only of very limited use.
For your information: to determine business expectations, the ifo Institute asks companies to mark their expectations for the next six months as "more favorable," "unchanged," or "less favorable." The balance value of expectations is then the difference between the percentages of "more favorable" and "less favorable" responses.
Given the security threats and the risks to the economy from the sanctions, as well as the uncertainties surrounding energy supply, what is this value likely to be in March? In our view, it is very likely that the overwhelming majority of respondents will assess their outlook less favorably on a six-month horizon. Business expectations would then decline significantly - and not gradually, as in a normal business cycle, but quickly and abruptly. As a result, this would be tantamount to a sell signal from the business cycle indicator.
We therefore simulated how the stock market indicator would react to such a development. The result: the equity allocation would be reduced to a range between 45 and 75 percent of the individually envisaged equity allocation.
Within this range, we are guided by the results of the capital market seismograph. We are therefore very excited about the new data, which we will probably be able to provide you with tomorrow. Please register with your mail address at www.private-wealth.de for a free six-month trial subscription so that we can send you a "private-wealth-alert" in this case.
The bottom line:
Current developments highlight the limitations of stock market models. In view of the extremely high probability of negative influences on the global economy, it is advisable to position oneself more defensively. In our opinion, the corridor of an equity quota between 45 and 75 percent is a good point of reference for this.
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 information purposes only and does not constitute an invitation to buy or sell securities.