Opinion: The never-ending stock market rally | Opinion | DW | 01.11.2017
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Opinion: The never-ending stock market rally

Stock investors are in celebratory mood as no other asset class is doing better than equities these days. As the bull run continues breaking all-time highs virtually every week, DW's Lars Halter sees clouds emerging.

If you are visiting the Frankfurt Stock Exchange these days, there's a conspicuous absence of exuberance on the trading floor. Stock brokers sit cramped behind their desks, many of them staring silently at the screens. An occasional whisperer mixes with the mechanical click of the turning chart board, making the floor sound like an empty train station and filling the air with eerie feelings.

The strange atmosphere at Germany's main stock exchange is somewhat telling because I'm not feeling quite comfortable as well in view of the developments on the world's bourses for the good part of the last decade. In fact, I'm scared about what is going to come in the near future.

By contrast, traders at Wall Street in New York seem less afraid of the future despite an almost nine-year bull run that has sent the Dow Jones to levels not seen before. When the US blue-chip stocks index hit 20,000 points in January this year, brokers were wearing base caps with "Dow 20,000" emblazoned on them. What began at the time was a busy year for base cap producers as well as stock traders, boosting the Dow beyond 21,000 points in March, 22,000 in August and 23,000 in October. At every new all-time high, a new delivery of record-busting base caps arrived at Wall Street.

As the US index has more than tripled since the financial crisis in 2009, is it now safely set for reaching the 25,000-point mark by the end of the year, and pushing also the German Dax beyond 15,000 points? Even though this doesn't appear unrealistic, there are number of reasons why stock markets around the world are in for a major correction.

Halter Lars Kommentarbild App

DW's busines and stock market reporter Lars Halter

Firstly, stock markets have been going up for much too long, and notably, without a significant fall for quite some time. There are warning signs on the road ahead, coming from US statistics and showing that especially American stocks are trading at multiples of their average price-to-earnings ratios. The figure, comparing current stock valuations with forward earnings, has only twice been higher in the history of the Dow Jones, namely during the run up of the 1929 stock market crash and the so-called "Black Monday" crash of 1987.

Another reason to worry is the fact that stock valuations are rising much faster than the economies supporting the boom. US investment legend Warren Buffet is keeping tabs of valuations versus economic growth, and the readings for this year are boding ill. A sound ratio in the opinion of the star investor would be 70 to 80 percent. But currently, equities are running 139 percent higher than gross domestic product (GDP), causing Buffett to describe the bull run as "playing with fire."

And yet, no-one has got burned along the way so far because a formidable crash needs a spark to set it on fire. I would have thought that the election of US president Donald Trump would come to be the loose cannon that crashed the gates - but not so, or even quite the contrary. Under the Trump administration, stocks are rising and rising, and that despite threats of a global trade war and, indeed, nuclear war with North Korea.

And how about Germany? The land of Europe's largest economy has seen unforeseen shocks too, e.g. billions of dollars in fines for Deutsche Bank and carmaker Volkswagen (VW) as they grapple with their past wrongdoings. Surprisingly, the DAX has kept up its steady climb, shrugging off the existential threats to some of the country's flagship companies which employ tens of thousands of Germans and investing billions every year. 

So what could really shake stock markets to the core, forcing the long-overdue correction? Most certainly for the time being, it's not monetary policy by the world's most important central banks. Just last week, the European Central Bank (ECB) has shied away from significantly tapering off its huge bond-buying program any time soon. And the US Fed, though set to raise interest rates for the third time this year in December, is light-years away from raising rates to levels that used to be normal in the past. 

As long as rates remain low, equities remain attractive, and even the stock market debuts of risky startups, such as HelloFresh at Frankfurt recently, become hotly-tipped opportunities to buy. The IPO of the food delivery service for home cooking was many times oversubscribed although the company hasn't turned a profit yet - a striking parallel to the dotcom bubble of the year 2000.

Having been a stock market reporter for DW for many years in the past, I've now grown weary of prophesizing gloom and doom for stock investors. My pessimism repeatedly caught me out to be wrong in the end. At one time, I will be right and stocks will crash. But till then, there may be a bit of time left to make a fast buck.


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