A month ago, the business cycle component of the private wealth stock market indicator had switched to red. The results of the Ifo Business Survey on the German business climate for August confirmed this assessment. The ifo economic traffic light is on red and on the ifo economic clock Germany is now clearly in the crisis quadrant.

You know: The decisive role in the analysis of the economic trend in the private-wealth stock market indicator is played by the ifo Institute's monthly survey of business expectations in German industry. Here the participants have a choice between three answer options: They expect their business to be either "more favourable", "unchanged" or "less favourable" over a six-month horizon. The balance value of the business expectations published by the ifo Institute is the difference between the percentages of the answers "more favourable" and "less favourable".

If this indicator worsens three times in a row in industry after a sustained rise, the business cycle component of the private-wealth stock market indicator switches from "green" to "red". This is exactly what happened in July. Business expectations in industry had successively fallen further and further in May, June and July. And in August, too, this indicator went down another notch.

The fundamental assessment for the stock market therefore continues to point to high risk. This is because the ifo data suggest a decline in demand for German industry in the third quarter.

This is a difficult situation for companies. Weak demand does not allow for further price pass-through. At the same time, wages and thus unit labour costs continue to rise. This is likely to have a negative impact on brands and profits.

Given this constellation, it is not surprising that last month a number of companies reduced their sales and profit expectations for 2023. And the reporting on the third quarter of 2023 will probably also be characterised by minor tones.

Nevertheless, there is hope. First, business expectations in industry fell only marginally in August - from minus 29.9 to minus 30.0 points. This fuels the hope that the bottom in expectations may soon be reached. Secondly, share prices have - at least in part - adjusted to the new situation. The DAX is now trading at just over 90 percent of its fair value and the significant overvaluation of small and mid-caps has been largely reduced.

We believe it is possible that a strategic buy signal for the German stock market will emerge in the next few months. In this case, the stock market indicator is holding back a comfortable cash position.

The bottom line:

The economic development in Germany and the market valuation of the DAX define the strategic corridor for the equity allocation of the private-wealth stock market indicator. Due to the weak economic component, this lies between 45 and 75 percent of the individually planned equity share.

Within this range, the capital market seismograph determines the exact positioning of the private-wealth stock market indicator. Since the seismograph continues to consider a full investment to be indicated, the stock ratio specifically suggested by the stock market indicator is set at 75 percent of the individually intended stock component. The positive probability landscape with the seismograph thus ensures that the reduction of the equity quota is currently lower than in comparable phases in the past. However, this can change quickly. We are therefore monitoring the seismograph very closely and will keep you informed.

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. For a more detailed explanation of the private wealth stock market indicator, please read "News from the editorial office - strategic buy signal for German shares" of 25 January 2023.

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