STOCK CORRECTION

DAX Tumbles After Dow Jones

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The DAX has taken a tumble. Is it just a blip or a sign of what's to come? Source: Reuters

The U.S. stock markets have experienced the biggest decline in six months. The leading index, the Dow Jones Industrial Average, closed down more than one percent at 20,668 points on Tuesday – the first time that’s happened since last September.

Prices on the German stock market also tumbled. The DAX opened on Wednesday 0.7 percent weaker and below the mark of 11,900 points. In doing so, it wiped out almost all of the gains made in March. Above all, it was bank shares that significantly lost in value. In the United States, Bank of America shares fell by 5.8 percent, while Commerzbank’s shares fell by more than two percent in Germany.

In a new survey of fund managers conducted by BofA Merrill Lynch, 81 percent of respondents found that U.S. stocks are overvalued. That’s the highest response on that issue in 17 years.

Two issues are weighing on the markets. On the one hand, there is growing doubt about U.S. President Donald Trump’s economic plans. Even the biggest optimists are slowly coming to the conclusion that Mr. Trump faces challenges to enacting his reform plans, said analyst Michael Hewson from CMC Markets UK. This even applies to the health care system, Mr. Hewson said, although the repeal of the Affordable Care Act is popular among Republicans. Other reforms, such as on taxes or banking regulation, as well as infrastructure spending, could therefore be postponed, he added.

The second issue influencing the markets is the policy of the U.S. central bank, the Federal Reserve. While rising interest rates normally have a negative influence on stock prices, it was reversed in recent weeks.

The prospect of rate hikes by the Fed fueled the stock exchange, especially bank shares. But after the rate hike last week, Fed Chair Janet Yellen said nothing about further interest rates. The disappointment over this hit Bank of America hard on Tuesday because it would benefit particularly from even higher interest rates.

Many investors are starting to view the rising prices in sinister light. In a new survey of fund managers conducted by BofA Merrill Lynch, 81 percent of respondents found that U.S. stocks are overvalued. That’s the highest response on that issue in 17 years. The fund managers consider European stocks, on the other hand, to be underestimated, as well as stocks from emerging markets. The S&P 500 is between 2,300 and 2,400 points and already in the range that many banks had set as their end-of-year goal.

However, there are indications that this is just a simple correction. The most important indicator for the entire capital market is the long-term bond yield, especially the percentage of 10-year U.S. government bonds. That U.S. shares have been highly valued for such a long time is primarily due to the fact that bond yields are so low. Because when less can be earned on bonds, investors are satisfied with shares with less profit.

 

Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. To contact the author: wiebe@handelsblatt.com

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