The capital market seismograph issues a thunderstorm warning. The probability of negative turbulence on the stock markets increases. It is advisable to further reduce the equity exposure.

Within the strategic corridor for equity allocation, which depends on the development of the economy and the market valuation, the capital market seismograph determines the exact positioning of the private-wealth stock market indicator. After a prolonged period in which the seismograph suggested being fully invested within the given range, the probability landscape has now changed dramatically. "The recommendation now is to be very defensive," informs Oliver Schlick, who translates the seismograph's signals into allocation suggestions for Secaro GmbH.

As they know, the seismograph combines different variables - early economic indicators, interest rate developments or even price fluctuations on the stock markets.
From these, it distills the probabilities for three market states over the next month. Green stands for the expectation of a calm, positive market. If green dominates, investors should invest in stocks. Yellow denotes the probability of a turbulent positive market - investing, but with a sense of proportion. And red indicates the probability of a turbulent-negative market. Then abstinence from stock investments is the order of the day.

For some time, "yellow" and "green" had dominated, the unfavorable expression "red" played only a minor role. "In recent days, red has now risen significantly and has thus developed a critical dynamic. I always compare this to dark clouds coming up. They can disappear again and there doesn't have to be a thunderstorm. But in a situation like this, it is advisable to stay at home and wait and see how the situation develops. For equity investors, this situation suggests a very defensive positioning," explains Schlick.

The capital market expert sees the economic background for this development in the market reaction to the publication of the ADP report last Wednesday. The service provider Automatic Data Processing publishes monthly U.S. non-farm employment figures and is considered a good indicator for the official figures of the U.S. government. "While the narrative of late has clearly been that only two U.S. interest rate hikes were still on the table, the market reaction to these numbers shows that people are not so sure about the matter after all. It is remarkable that on the following day of the official publication, which then turned out not as bad as feared, the market could not correct its downward movement! The rise in U.S. bond yields that accompanied this development reverberated within the capital market seismograph and, moreover, raised fears that U.S. equity valuations might be too high after all in relation to this interest rate environment," explains Schlick.

Consequently, the seismograph recommends defensive positioning. "We now have to wait and see if the rise in red probability continues. Should this not be the case, the seismograph could step by step abandon its basic defensive stance again. For the time being, however, the motto is: caution is the mother of china," concludes Oliver Schlick.

The bottom line:

In view of the dramatic crash in ifo business expectations in industry, the business cycle component of the private-wealth stock market indicator was already urging caution on June 26. At that time, we had considered it prudent to reduce the range of the strategic corridor for equity allocation to 55 to 85 percent.
At that time, the aggressive positioning of the seismograph suggested keeping the actual equity allocation at the maximum of the strategic corridor. Now, the actual equity allocation suggested by the stock market indicator will be further reduced from 85 percent to 60 percent of the individual designated equity allocation, in line with the weighting recommendation of the seismograph. The cash ratio will be increased accordingly.

Sincerely 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 informational purposes and is not an invitation to buy or sell securities. For a more detailed explanation of the private wealth stock market indicator, please read "News from the Editor - Strategic Buy Signal for German Stocks" dated January 25, 2023.

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