by Melanie Loos
As the German stock index DAX is approaching its 25th anniversary it has reached record levels. It has been at such a high only twice before in its history. But what does it really mean in times of economic crisis?
The German stock index DAX turns 25 this year – on 1 July to be precise. And it has never been at such a high. In its 25 years history the DAX reached its first record high with the German reunification in 1989. Today it is the European Central Bank’s pledge to save the euro and its low interest rate policy that boosts investors’ confidence, and thus the share markets.
Since its President, Mario Draghi, announced that the “ECB is ready to do everything to preserve the Euro” in July 2012, the German stock index has increased by almost 2,000 points. In May this year the DAX had reached the 8,000 mark – an all-time record high. But is it a reason for optimism in view of the European debt crisis which is far from being solved?
In early May the European Central Bank had reduced the interest rates once again to a record low of 0.5 per cent. It is meant to encourage companies to borrow at favourable rates and to invest. This boosts company profit expectations and therefore soaring share prices. As a consequence the DAX hit the 8,000 mark and climbed steadily up to 8,500 points (8,530 on 22/05/2013).
Since then it has however been declining. Due to the rather negative economic outlook by the ECB President the DAX has fallen below the 8,100 mark for the first time since the beginning of May, closing at 8,098 points (-1.19 %).
Most experts expect the bull market to continue, although with some ups and downs, but reaching the 8,500 level later in the year. One of the reasons is that the ECB is very likely to maintain the low interest policy in the foreseeable future. However there is also scepticism, because as history shows every time the DAX hit such record levels (in 2000 and 2007), it crashed soon after.
One of those who project a positive trend for the DAX is Andreas Hurray, equity market strategist at Commerzbank. “First, in March 2000 and July 2007 central banks were on the side of the bears. Fed policy was restrictive in 2000 and 2007 with high key interest rates whilst the U.S. yield curve was inverted,” Hurray said. “The ECB also maintained a restrictive policy in both periods which resulted in high interest rates and flat M1 money growth in the euro zone.”
It thus remains to be seen how sustainable the current situation will be.