The ifo business climate index delivered a positive surprise at the end of the year. For the third time in a row, the business expectations of the 9,000 entrepreneurs surveyed by the ifo Institute rose significantly in December. In ifo diction, this is considered a sign of a turnaround in the German economy.

The details: After an almost continuous decline since February 2022, the mood among entrepreneurs has been steadily improving since October. The pointer on the ifo business cycle clock (chart above) is now moving back in the direction of recovery. And the ifo economic traffic light (chart below) even shows green. It thus signals a probability of more than two-thirds for an expansionary development of the German economy in the next month.

This is surprising. After all, the consensus among economists is that we will experience a recession in the next six months - in other words, a decline in economic output. Does the ifo Business Climate, a proven leading indicator, anticipate the possible upswing in H2 2023 before the recession has even started? This is a very unusual constellation.

One explanation could be that entrepreneurs were simply too pessimistic in the past months and are now putting this into perspective somewhat. A report by the ifo Institute on 13 December fits this. "Entrepreneurs in some sectors of the economy seem to have used the price increases to expand their profits," said Joachim Ragnitz, deputy head of the Ifo Dresden branch: "According to Corona, private households had accumulated high savings. These were liquidated in 2022 and fuelled consumer demand. Government relief is also likely to have helped support demand and thus widened scope for price increases."

So we have seen a whoosh price spiral in recent months, with many companies benefiting.

The big question is: Can this continue? Or will the long feared consumer reluctance to spend become a reality after the holidays? Will margins come under pressure if higher prices are no longer so easy to implement?

The ifo business climate index in January will provide information on this. For equity investors, this is a particularly important date.

As you know, the private-wealth stock market indicator is based on business expectations in industry. So far, these have improved twice in a row. A third rise in January would trigger a buy signal for German equities in the model. We are curious.

The bottom line:

The ifo business expectations in relation to the economy as a whole have already indicated an economic turnaround. In the case of the private-wealth stock market indicator, a buy signal could be triggered in January if business expectations in industry continue to improve. Until then, the model remains cautiously positioned.

This defensive positioning is also supported by the capital market seismograph. "For some time now, the probability landscape has shown a very clear picture: red dominates, the other expressions play no role. Since the risk of setbacks on the stock markets is high in such an environment, the seismograph continues to advise to be very cautious and to weight stocks low," explains Oliver Schlick, who translates the signals of the seismograph into allocation suggestions for Secaro GmbH.

For the private-wealth stock market indicator this means: The strategic corridor of the stock market indicator is (still) at an equity quota between 45 and 75 percent of the individually intended equity share. Because the seismograph continues to be positioned defensively, the overall equity quota suggested by the private-wealth stock market indicator remains at 50 percent of the individually intended equity share.

Yours sincerely,

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 informational purposes and is not an invitation to buy or sell securities.