Over the past two years, I have closely and critically monitored the takeover of power by the current US administration. For me, it was clear from the beginning that such a polarizing and downright destructive behavior in the medium to long term must lead to distortions on the stock markets.
The markets faded in 2017 completely. Instead, initially there was only euphoria due to deregulation and tax cuts. Now the mood could change. Nevertheless, there are opportunities for investors.
US markets are uncertain
The tax reform and the environmental and social contributions made under the guise of the word “deregulation” have been extensively celebrated by American investors. Almost every day there were new record highs on the major indices.
But gradually there seems to be some uncertainty too: does irresponsible indebtedness not lead, sooner or later, to a dangerous decline in currency and creditworthiness? Will the central bank now be forced to accelerate rate hikes by unnecessarily fueling the economy to capture impending galloping inflation? Will the aggressive stubborn and strange foreign policy prove to be a boomerang for the local economy? What if China and Japan cease funding everlasting trade deficits?
The economy is still buzzing and not much has happened on the stock markets. The Dow Jones index is still positive, despite the recent price declines on an annualized basis – but only minimal for Euroland investors, as the US dollar has depreciated almost in step with the euro – and that is precisely the point why I see the future for investments in the US rather black: Either the stock markets or the dollar could still crash a good deal , depending on how vigorously the Central Bank counteracts.
What world investors must pay attention to
It is clear that global companies can not completely escape the events on the other Atlantic side. On the one hand, they often have a strong presence there and, on the other hand, the US is still one of the most affluent buyers of cars and industrial goods. Neither an even stronger euro nor a collapsing US stock market would be helpful for German stocks.
Nevertheless, it is clear to me that the current valuations have already priced in many of the aforementioned dangers, even after the highs made no excessive impression on me. While the overheated US technology index Nasdaq is only a few percent below the all-time high, the DAX is already much more – even though we compare the price index with the performance index here. Because actually the DAX should grow month by month by the calculated dividends.
An entirely different, but perhaps even more important, argument is that German corporations have the backing of a solid state treasury with a flawless AAA rating. If US sales collapse due to trade barriers or a weakening economy, then the government, in conjunction with European institutions, can set up programs worth billions at any time.
The US government, on the other hand, may soon be shackled because of its huge debts and deficits, as well as the provoked diplomatic conflict with creditor China. Whether the well-publicized infrastructure program can really be enforced there seems questionable against this background.
Now comes the test
Anyone who reads has certainly already prepared for the current situation, for example by reducing risk positions and increasing the cash portion. Now it is important to keep a cool head and to analyze sharply. I do not think that you should throw out valuable and profitable companies as well as well-financed growth stocks with a strong business model.
On the other hand, now is not necessarily the time to shoot all his powder at once. Rather, it could be a good strategy to slowly back up its portfolio with solid stocks. Many prices have recently come down sharply and the majority of DAX companies continue to write billions in profits, which they can invest in strengthening the balance sheet or adapting to new market conditions.
When the finance bosses understand their craft, they are now making sure their companies are well-hungry so they can emerge stronger from the next crisis. That’s why it’s important to keep a close eye on which companies are blinded by overseas tax credits and who are working to become more robust, such as repatriating debt, improving their cost position, or increasing their flexibility.