Does inflation ever move significantly the other way round?

Despite the corona crash, it is on an upward trend : The amazing development on the stock exchanges and their reasons

Quite a few rub their eyes in amazement these days. Germany is plunging into an unprecedented recession as a result of the corona pandemic. According to estimates by the International Monetary Fund (IMF), there is a risk of the greatest economic slump since the global economic crisis 90 years ago.

The share prices, however, are at a level that is almost 30 percent above the low of March 19, when it was clear that economic activity in Germany would come to an almost complete standstill for at least weeks. With a good 10,800 points, the German share index Dax on Wednesday was still a good 20 percent in the red compared to the record high of 13,795 points on February 17th. But after the index fell 40 percent by March 19, investors and experts feared another dramatic fall.

Amazingly, this never happened - on the contrary. Main reason: The unprecedented, historically unique rescue packages of the governments, and that worldwide in the trillions. In addition, the central banks have provided the economy and banks with liquidity like never before. The European Central Bank (ECB), for example, initially increased the volume of its bond purchases by 120 billion euros, and shortly thereafter added another 750 billion euros. "So there is an abundance of liquidity for a long time," says Olivier Berranger of the La Financière de l’Échiquier fund company.

Computers fuel crashes - and booms

In addition, private investors in particular have not shown any panic. “Our customers reacted very carefully,” says Ralf Lochmüller, head of the Lupus Alpha fund company. Martin Lück from asset manager Blackrock speaks of rational behavior.

The dramatic downturn in March was apparently driven by professional investors. Much of the trading takes place through computer programs that automatically sell stocks at certain thresholds. Conversely, they had to get back in afterwards when prices moved up.

But how does it go on? The range of forecasts is wide, a clear sign of the high level of uncertainty. However, hardly any expert expects another crash. On the other hand, Lochmüller says: “We don't know whether it was that on the stock exchanges.” Lück does not rule out that the Dax will be lower in a year than it is currently. What seems certain, however, is that investors have to be prepared for significant swings up and down.

Sometimes the Dax rises by five percent, then it loses again by a similar amount. For DZ Bank, it is certain that the stock market barometer will probably only be able to reach the level from before the crisis at the beginning of 2024, i.e. in just under four years. “Setbacks are part of the world of the stock market like the display board in the stock exchange room - but also the subsequent recovery,” says Ulrich Kater, chief economist at DekaBank.

Recession is inevitable

The stress factors remain high for the time being. A dramatic recession is inevitable, world trade is shrinking, and unemployment is rising. Corporate profits will collapse. The reports for the first quarter were and are harbingers. However, they only partially show the effects of the corona pandemic, after all, business was still good in January and February.

Only in the second quarter of the year will the crisis fully affect companies. One by one, companies are canceling the dividends that have already been promised. DZ Bank speaks of cuts of 100 billion euros in Europe. They could shrink by a total of 40 percent. The massive drop in the price of oil makes energy costs cheaper for companies and for consumers, heating oil and fuel at filling stations. But this, too, is above all an indication of the drama of the crisis. When oil is in abundance, it shows how bad the economy is doing.

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Nevertheless, there are also some indications that the stock market could slowly pick up again. The first easing measures are being registered, especially developments in China. The financial markets generally look to the future. Economists expect the crisis to subside in the second half of the year and a clear recovery with clear growth rates in 2021.

In general, however, one question is of paramount importance for retailers and investors as well as for the economy, consumers and society in general: How can the corona pandemic be overcome, when are effective drugs available, and when, above all, a vaccine?

Interest is not coming back

Regardless, stocks remain in focus for several reasons. “The interest rates have disappeared,” says economist Kater. “Even more than before because of the corona crisis.” The indebtedness of the states is increasing. This means that monetary policy must keep interest rates low. "Hoping for the return of interest on the savings accounts is therefore unrealistic."

Other economists do not expect the ECB to raise key rates for years. Bonds are also unattractive in terms of interest rates: the yield on Bunds is clearly negative. The situation is similar with French government bonds. US government bonds are currently only bringing in around 0.6 percent.

Despite the crisis, there is a lot of money around looking for investment opportunities. Many investors have solid stocks in their sights. That supports the courses. In any case, there are other sectors besides the health and medical sectors that are also benefiting from the crisis.

"Rise in inflation not likely"

A lot of liquidity in the economy and financial markets actually point to rising inflation, which in turn would speak against stocks. But that too cannot be seen far and wide. In many industrialized countries, inflation expectations are at the lowest level ever - because of the central banks and also because of the dramatic fall in the price of oil. Consumers will tend to hold back after the crisis, adds Markus Demary from the Institute of German Economy. "Overall, an increase in inflation is not likely." On the contrary, Corona could even lead to deflation.

Even if the gold price has risen significantly in recent weeks because the precious metal is considered a “safe haven”, experts do not see it as a real investment alternative. Precious metal prices could follow the development of the oil price and the poor development of the national product, says Youn-Cong Choi of precious metal company Heraeus.

It cannot be ruled out that the large amount of investment money will lead to undesirable developments. “In view of the almost non-existent risk of inflation, liquidity could be significantly increased. However, this harbors the risk that bubbles will form on the markets, ”says investment strategist Berranger. In turn, other observers do not see this. The recovery in the stock markets is fragile, emphasizes Dave Lafferty of Natixis Investment. He fails to see that the “historically strongest blow to the global economy” has already been digested after a few weeks. "Market participants continue to underestimate how long and how severe the effects of the global shutdown will be."

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