Market Exuberance Analysts Question Trump's Bull Run

The new U.S. president is fueling a rally, both on Wall Street and on the DAX. Optimism is the overwhelming sentiment among investors, and yet equities strategists are beginning to warn of risks.
Traders are in an optimistic mood.

Most of the action is happening in the United States at the moment. After the inauguration of new U.S. President Donald Trump, many investors briefly held back but then returned to buying stocks. This lifted the important Dow Jones Index above the historic mark of 20,000 points by the middle of the week. Other leading U.S. indices, like the broad S&P 500, also reached new record highs.

The Trump rally has also reached European stock markets. On Thursday, Germany's DAX benchmark index reached 11,893 points, its highest level in 20 months. Reputable investors expect it to continue to rise. Even the DAX's all-time high of 12,390 points suddenly seems within reach again.

"The chances are good" that the DAX will soon reach 12,000 points, said Björn Jesch, head of portfolio management at Union Investment. Ralf Zimmermann, equities strategist at Bankhaus Lampe, also expects the DAX to cross the threshold in the course of the coming fourth-quarter corporate reporting season.

But the experts are still not entirely at ease. While it is true that markets have been optimistic since the U.S. election, many believe the DAX would have performed well regardless of who won. And there is a high risk that it could all go wrong.

Investors primarily associate the current bull market with the hope that Republican President Trump will keep his campaign promises and give a decent boost to the economy. While tax cuts would primarily benefit American citizens, international corporations expect to see new business from the extensive infrastructure investments promised by Mr. Trump.

The economic signals Mr. Trump sends out in the first 100 days of his presidency will be critical for the financial markets, said Martin Lück, the senior capital market strategist for Germany, Austria and Eastern Europe at BlackRock.

"We believe that Donald Trump, as a person, is so narcissistic that he wants to avoid disappointing his voters, as well as the media, the financial markets and the general public at all costs, at least in the beginning," Mr. Lück said. In his view, one consequence could be that campaign promises will be followed by political measures that not only justify but also continue to fuel the Trump rally.

Many believe the president is not the only driver of the market. Carsten Klude, chief economist at M.M. Warburg said share prices primarily depend on changes in corporate earnings, which have been more positive than expected, and that, if anything, is driving the bull market.

We expect that the DAX could approach its all-time high in the spring. But that could be followed by disappointments, because the Trump effect will fade in the United States. Christian Kahler, Equities strategist at DZ Bank

"The earnings of companies on the DAX have seen somewhat better improvement in recent years than those of companies listed on the S&P 500, which is why the DAX should also be capable of achieving a new record high," he said.

Mr. Jesch of Union Investment expects to see earnings growth of somewhat more than 10 percent among European companies in 2017. "This is a solid basis for gains on European stock markets, especially in Germany," he said, adding that he believes a gain of around 5 percent in 2017 is possible.

Experts say that valuation also favors the DAX. Christoph Ohme, equity fund manager with Deutsche Bank's investment fund subsidiary, Deutsche Asset Management said the DAX reaching 12,000 points would correspond to a price-earnings ratio of about 13.6. "That doesn’t sound overly aggressive in the context of DAX valuations over the years," he said. Besides, he added, the DAX is still trading at a discount relative to other European and America stocks.

Even if Mr. Trump triggers high spirits in the markets, and there is a lot of confidence in the DAX, analysts recognize the risk of setbacks with stocks. "We expect that the DAX could approach its all-time high in the spring. But that could be followed by disappointments, because the Trump effect will fade in the United States," said Christian Kahler, equities strategist at DZ Bank.

The growing protectionist approach in U.S. economic policy is seen as a risk. "This may affect Germany, as an export-driven country that has benefited from both free trade and the weaker euro in recent years," said Mr. Ohme.

Shortly after his inauguration last Friday, Mr. Trump began making good on some of his threats from the campaign. He pulled the United States out of the Trans-Pacific Partnership or TPP, and he also said he wants to renegotiate the North American Free Trade Agreement, NAFTA.

Mr. Zimmermann argued that this poses a significant risk, citing the Ifo Business Climate Index of German companies, which declined significantly in January from 111.0 to 109.8 points. This suggests that while corporate leaders hold a more positive view of the current business situation than in the past, their expectations for the next six months have declined.

"It is the first visible warning sign that the latest tailwind for stock investors is changing into a headwind," said Mr. Zimmermann. Germany companies are concerned about Donald Trump's America First policy. The strategy could have a negative impact, said Mr. Zimmermann, noting that such fears are probably realistic, in light of Mr. Trump's ongoing protectionist attitudes.

Mr. Jesch of Union Investment believes Mr. Trump’s policies could suddenly become a liability. He added there are also other political risks associated with the many elections in Europe and discussions about the sustainability of Chinese economic growth. "Investors should also expect the unexpected," he said.

Mr. Ohme of Deutsche Asset Management also points to Europe's very weak economic situation as a risk. Southern European countries, in particular, are still struggling with the consequences of the financial crisis and low economic growth. "Because Europe is still Germany's biggest export market, this is not happening without having some impact on us," he said.

For these reasons, volatility in the stock markets is likely to increase in the coming months. David Kohl, chief economist for Germany at Bank Julius Bär Europe, sees the fair value of the German benchmark index at 12,250 points – based on current earnings estimates. "During the year, the DAX corrects by 18 percent on average. At the current level, that would signify a decline to below 10,000 points."

At the moment, investors are not overly impressed by such warnings, as the DAX continued to rise on Thursday. The benchmark index was still slightly in positive territory by late afternoon, with the prevailing hope being that the Trump rally will continue – for now.


Georgios Kokologiannis is an editor with Handelsblatt's finance team. Anke Rezmer covers the investment fund industry for Handelsblatt. Susanne Schier heads the private investment team at Handelsblatt's Frankfurt finance desk. To contact the authors: [email protected], r[email protected] and [email protected]