Things can get worse, and they did
By John Weedon
faz.com
FRANKFURT. Analysts said the mid-week recovery from a pitch-black Monday was probably no more than a technical reaction, meaning that market participants have to reckon with further setbacks in the coming weeks. Although it finished up on Wednesday, before the Oct. 3 national holiday, the Dax's roller-coaster shape since the beginning of the week seems to confirm that assumption. It was back in negative territory amid listless holiday trading on Unification Day.
Monday's collapse was the steepest for leading indices in both the United States and Europe since the stock market crash of 1987. The Dax plummeted to its lowest level since 1996. Between July 1 and Sept. 30, it slipped by 36 percent. According to Bloomberg, this was the highest quarterly loss on the German stock market since 1959 - and that amid a bear market that has already lasted more than two years. A sorry verdict for this country: Among the world's leading stock market indices, only Brazil's Bovespa performed worse than the Dax.
Valuation multiples have sunk to levels that may lure gutsy investors back to the market, and equity valuations now compare favorably with bond valuations. Not without a reason, though: The market as a whole is weighed down by a flagging economy and war-mongering in the Middle East, and many companies and sectors still struggle with serious problems.
For the moment, the downward revisions in corporate earnings forecasts by far outweigh the upward revisions. And this week's data releases showed both the U.S. and euro-zone purchasing managers' indices retreating below 50 - a level that indicates contraction. In the euro zone, the drop was driven mostly by a sharp output decline in Germany.
On top of these global ailments, the Dax is suffering as a government struggling with dried up revenues and runaway outlays is feared to consider tax hikes that could nip the German recovery in the bud. The Dax's sectoral composition also does not help as the German index is more exposed to the struggling technology sector than most of its foreign counterparts.
Another weighty Dax constituency, financial stocks, has also been among the biggest losers of late. Financial and technology stocks together account for about 46 percent of the Dax, compared to corresponding ratios of just 20 and 35 percent, respectively, for Britain's and France's leading indices.
Market participants who hope that the crashing stock market will finally prod the stubbornly price-oriented ECB into stimulating monetary action were dealt a blow last week when Ernst Welteke, an ECB Council member and Bundesbank president, relativized the economic effects of financial market disturbances at a London conference.
Welteke cited studies finding that a 10 percent drop in the Dax generally causes no more than a 0.2 percent fall in consumption - a negligible negative wealth effect, he concluded. Welteke also called the current situation a temporary phenomenon of “post-bubble blues.“
Even if the mood may be more pessimistic than the fundamentals warrant, it takes a soothsayer to tell whether or when the bottom has been reached. For the moment, one can only suspect that the cloud over the market is here to stay until there is less uncertainty in the Iraq crisis and some really encouraging news from corporate headquarters.
Oct. 4 |
