Stock market booming. Economy weakening. What’s going on?
The overwhelming bureaucracy and the increasing shortage of skilled workers are a heavy burden for Germany. In addition, high energy costs and weak demand due to inflationary prices add to the strain.
Our country is far from doing well. It’s no wonder that Federal Minister of Economics Robert Habeck speaks of „cause for concern“ regarding the economic situation.
The economy is sluggish. According to tagesschau.de, experts expect a decline in gross domestic product (GDP) in the first quarter, which would mean a technical recession.
At the same time, the DAX is reporting new record highs again and again. Since the beginning of the year, the German stock index has gained around 4 percent, and since the low point at the end of October, the increase is at 18 percent.
The economy is struggling while the stock market is booming. How can this be?
This is how the DAX and the economy are connected. Or not. Emanuel Mönch, Professor of Monetary Policy and Financial Markets at the Frankfurt School of Finance & Management, explains the paradox on tagesschau.de: „To say that if the German economy is in recession, the DAX must also be weak, is too simplistic.“ While there are close connections between the stock market and the economy, „the DAX is not a pure reflection of the German real economy.“
The fact that the DAX and the German economy can develop differently is due, among other things, to the international orientation of DAX companies. „Only a small part of the business takes place in Germany for the large DAX companies,“ emphasizes Andreas Hackethal, Professor of Finance at Goethe University Frankfurt, on tagesschau.de. Experts estimate that around 80 percent of the DAX companies‘ revenues are generated abroad.
Influencing factors from abroad In the US, there is currently a hype around artificial intelligence, after the chip company Nvidia reported a quarterly revenue above expectations for the sixth time in a row. The euphoria also spilled over to the stock markets. New record highs were reported on the US stock exchanges, which also boosted the DAX and Asian indexes.
In addition, the positive performance of the DAX can be attributed to interest rate expectations. Experts communicate that both the US Federal Reserve and the European Central Bank plan to lower interest rates again soon. With high interest rates, many investors turn away from stocks because there is a risk-free alternative. This will change when interest rates fall. Stocks then become more attractive.
It is said that the stock market trades in the future. Investors assume that we have reached the bottom and things will soon turn around. Will it really happen? We don’t know!
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