The news of the day was worth a report on Thursday: Germany’s leading index Dax set a record with 14,132 points. But what sounds sensational is almost useless these days. After all, it was the third maximum in three days.
The US Dow Jones index also set a record this week with 31,158 points, as did the S & P500 index, which is the value of the 500 largest US listed companies. In Japan today, the Nikkei has risen to a 30-year high. And bitcoin also haunts from record to record; on Friday, the value rose above $ 41,000 for the first time.
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Many observers ask: How is it possible that the corona crisis is getting worse, the economy must suffer enormous constraints – but stock markets are being bullied? And investors want to know: “Will the rally continue this year?
Analysts expect further growth
In fact, most analysts expect prices to rise further in 2021. This is supported by some megatrends: On the one hand, the corona crisis is expected to end. “There has been a boom after every pandemic,” says Christian Kahler, chief strategist at DZ-Bank. “The joy of life returns.”
On the other hand, Joe Biden’s inauguration as US president makes markets easier. The strong increase on Thursday can be attributed, among other things, to the new majority of Democrats in the US Congress. In addition, with the Brexit trade agreement reached at the last second, another Damocles sword was dropped, which has been burdening the economy for years.
There is an awful lot of money around
However, there are other factors that speak of a further increase and at the same time explain the current rally. On one side is the role of central banks. In the fight against the corona crisis, US and European monetary authorities have launched large-scale funding programs. This means: there is much more money in circulation. The M1 money supply – ie cash in circulation and deposits in accounts – increased in the US from $ 3.86 trillion in July 2019 to $ 6.05 trillion in November 2020. This is an increase of almost 60 percent. Before that, the value had barely moved up and down by more than 20 percent for decades.
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In addition, the savings rate increased during the crisis. As no money could be spent on travel and other leisure activities, many consumers’ wallets have recently deepened despite the crisis. According to DZ Bank’s calculations, the financial assets of private households in Germany alone are likely to increase by 393 billion euros, which is 5.9 percent to a record value of 7.1 trillion euros in 2020.
These two points show that the current economic crisis cannot be compared to the financial crisis in 2008 – and therefore the same consequences cannot be expected on the stock markets. While the liquidity crisis was the biggest problem in the markets a good ten years ago and banks no longer trusted each other that their loans could be repaid, this time the problem is not money. Thanks to the massive support of central banks and governments around the world, confidence in solvency remained – probably the main reason for the rapid recovery after the March slump.
Stocks are becoming increasingly popular
So all the money in circulation now wants to be spent or invested. The former would still support the markets, but the latter should in many cases also manage stock trading. Because due to low or even negative interest rates on the account and the unprofitable bond market, many consumers have discovered the stock market for themselves.
After reaching its maximum, DAX was only slightly downhill on Friday, Daniel ROLAND / AFP
According to Deutsche Bank, the number of negotiated shareholders increased significantly in 2020. In the first half of the year alone, approximately 500,000 new warehouses were opened. Younger investors in particular have acknowledged that the stock market currently promises the highest returns. According to a study by Comdirect, Consorbank and ING, the number of shareholders among those under the age of 25 has recently increased by 13 percentage points to 39 percent.
This was also evident in the social media response to the $ 600 stimulus checks that US citizens received as part of the latest economic stimulus package. At Tiktok and Reddit, users are pushing each other for investment strategies, such as the easiest way to double their $ 600 in the stock market. Not every tip should be recommended for imitation.
Will the bubble burst?
And so more and more money is flowing into the markets. Does it all end in a bubble now? Or in hyperinflation? Due to the hype surrounding stocks and bitcoins, many investors are reminded of the 2001 bubble. Formally, at least, there is no inflation. The official rate is currently even below the target of two percent. However, there are experts who talk, for example, about sectoral inflation with regard to the development of real estate prices.
And price-earnings ratios, especially among recently emerging technology groups, are seen as exaggerated. Here, however, there is a rush: the stock market predicts developments. An example of this is Biontech’s inventory, which recorded the biggest leaps before the vaccine was shipped. Investors have therefore already set a price for future success. If they do, it should continue to improve. Otherwise there is a risk of a declining trend.
However, analysts at MM Warburg consider it quite possible that expectations will be met. Many companies would use 2020 to reduce costs. Once the economy recovers, profits should rise rapidly. “We are very optimistic that stocks may rise to higher valuations,” the bank said.