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Investors Should Be Thankful for Germany

11/26/2012

Over the past few days Americans have had the opportunity to spend holiday time with family and friends. Certainly, in the tradition of Thanksgiving, they offered thanks for the many blessings in their lives. As we return to work in full force this Monday, investors are also anticipating the return of Congress and what will be a volatile next few weeks as an agreement on avoiding the fiscal cliff is negotiated.
 
While Congress was back home for the holiday, global markets enjoyed an excellent rebound recovery. The S&P 500® Index (SPX) rallied 4.13% on the week, placing the SPX (Figure 1.1) in a much more favorable position by holding support on the technically important 62% retracement level at 1345.69.
 
Upon return this Monday to more favorable market conditions, I offer to investors that they should include positive performance from Germany in their “market blessings.” Very quietly once again the German equity index (DAX) led developed market indices higher, appreciating 5.16% for the week.  Within last week’s “Checking the Technicals” blog, I referenced the importance of the DAX (Figure 1.2), holding its long-term 200-day moving average. In fact, that is exactly what occurred this past week.
 
However, my usage of Germany as a global indicator goes beyond just technical. Investors should also be thankful for continued solid fundamentals.  The resiliency of those fundamentals are rooted in a 6.9% unemployment rate (Figure 1.3) that is just .1% above its 20-year low. What is evident since the euro debt crisis began is that any time the euro suffers a modest decline as it did mid-September into mid-November, the German export economy seems to benefit the most. Evidence to that was Friday’s better-than-expected 1.4% climb in exports.
 
Business surveys also came in better than expected with the Ifo Business Climate Index rebounding from a 30-month low to a record 101.4, much better than the estimate for 99.5. The sub-indexes of the report came in much stronger also, with “Current Assessment” rising to 108.1, ahead of the 106.3 estimate, and “Expectations” rising to 95.2, ahead of the 93.0 estimate.
 
The consumption side of the German economy was strong also, rising 0.3%, ahead of the 0.2% estimate.
 
What investors should do with the positive German technical and fundamental conditions is to continue to use it as a leading indicator of where the SPX is headed. More importantly, however, use it as an alert for a potential upgrade for emerging markets as an asset class. The U.S. has outperformed emerging markets in 2012; and strength in Germany historically translates to strength in Asian economies. As the year closes out, that German/emerging market relationship is something to pay close attention to. It might be a leading indicator for a shift back toward emerging market outperformace.
 
At the very least be thankful for Germany….
 
Figure 1.1 S&P 500 Index (SPX) Year to Date

Source: Bloomberg
 
Figure 1.2 German Equity Index DAX Year to Date

Source: Bloomberg
 
Figure 1.3 German Unemployment Rate 1992 to 2012

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.