At the end of July, the results of the private wealth stock market indicator made it seem advisable to significantly reduce the equity allocation from 110 per cent of the individually planned equity allocation to 90 per cent and to increase the cash allocation accordingly. The main reason for this was the slowdown in the German economy. According to the ifo Institute, 43.6 per cent of respondents from domestic industry now report a lack of orders.

As published at the time, only the sustained positive probability landscape of the capital market seismograph prevented an even more drastic reduction in the share quota. This raises the interesting question: How is the seismograph reacting to the recent turbulence on the stock markets? Is this just a temporary phenomenon or the harbinger of a major stock market earthquake?

For your classification: The private wealth stock market indicator combines three factors. The economic trend in Germany and the market valuation of the DAX define the long-term, strategic corridor for equity allocation. The capital market seismograph determines the exact positioning within this strategic range. This is because it can react much faster to current developments than the relatively sluggish economic model.

Specifically, the seismograph uses various variables - leading economic indicators, interest rates, yields on the corporate bond market and price fluctuations on the equity markets - to calculate the probabilities of market conditions in the coming month. A distinction is made between three scenarios. Green stands for the expectation of a calm, positive market. If green dominates, investors should invest in shares. Yellow indicates the probability of a turbulent, positive market - investors can invest, but should exercise caution. And red indicates the probability of a turbulent-negative market. At high values, abstinence from equity investments is called for.

It is interesting to note that the probability of positive turbulence (yellow) has become increasingly dominant since mid-July. It was therefore not entirely surprising that the stock markets would become more turbulent. Nevertheless, the seismograph remained offensive. How has it now changed in view of the recent price slumps?

"The important thing for investors is that the basic structure of the probability landscape has remained stable. Yellow has risen even further at the expense of green and now clearly dominates the probability distribution. However, the probability of negative turbulence remains insignificant with values below two per cent," says Oliver Schlick, Managing Director of Secaro GmbH, who regularly calculates the results of the seismograph and derives allocation proposals from them. His conclusion: "From a modelling perspective, the events of the last few days can be interpreted as a brief summer storm - it came suddenly, but was also over quickly. The approach of a sustained storm front cannot be seen in the data."
In Schlick's view, market participants have fallen for an optical illusion. "Individual aspects - problems with investments financed in yen, a weaker US labour market, slightly disappointing quarterly results in the tech sector - have been woven into a whole new script on the stock markets. Instead of growth and falling interest rates, the headline was suddenly recession and falling interest rates. But this is a mistake. If the investment environment had fundamentally changed, this would be reflected in the input variables of the seismograph. But there is nothing to be seen there," analyses Schlick.

What do the input variables of the seismograph actually look like? A global indicator is included in the model to assess the economy. "This is still on course for growth. The fact that German industry is not emerging from the crisis is not due to global weakness, but is a structural German problem," explains Schlick.
The interest rate spread between corporate bonds with different credit ratings - an indicator of stress on the capital market - has also hardly changed recently: "The risk premiums are stable and also show no sign of a regime change".

Only the rise in volatility, the barometer of fear on the stock market, is a cause for concern. "But this isolated negative factor is more or less offset by the recent significant fall in interest rates. The basic message of the seismograph therefore remains unchanged. The probability distribution remains promising. There is no reason to panic," concludes Schlick.

The bottom line for investors:

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.

As the economic component has recently deteriorated significantly, threatening a strong sell signal for the DAX at the end of August, the strategic corridor for the equity allocation was already reduced as a precautionary measure in July - from 70 to 110 per cent to 60 to 90 per cent.

The DAX has recently become somewhat more favourable in relation to its fair value. German shares are currently slightly undervalued. However, this alone is not enough to increase the equity allocation.

Within the strategic range of 60 to 90 per cent, the capital market seismograph determines the exact positioning. In view of the persistently positive probability landscape, it is advisable to position oneself at the upper end of the corridor. The equity allocation of the private wealth stock market indicator therefore remains at 90 per cent overall.

An example: Anyone who considers an equity allocation of 50 per cent to be optimal based on their individual preferences is currently 45 per cent invested in equities (90 per cent of 50 per cent results in an equity allocation of 45 per cent).

Yours sincerely,

Klaus Meitinger

Note: Despite careful selection of sources, no liability can be accepted for the accuracy of the content. The information provided on the private-wealth stock market indicator is for information purposes only and does not constitute an invitation to buy or sell securities.