As certain national governments around the world relax social distancing rules and reopen their economies in the wake of COVID-19, hopes are high that the global economy will be able to quickly snap back from the pandemic-induced recession. Germany, Europe’s largest economy, has tentatively resumed most business activity after its widely-praised response to the virus has kept infections and deaths to a relative minimum.
The US, meanwhile, is also reopening businesses and resuming activity across all 50 states, despite the rate of infections and deaths remaining the highest in the world. As these two global economic powerhouses attempt to return to normality, analysts will be looking at their respective stock markets to measure how the recovery is going.
In the US, the most respected stock index is the Dow Jones Industrial Average (DJIA), which tracks the stock performance of 30 of the largest and most influential American companies. The German equivalent is the DAX 30 index, which is a straightforward index of the 30 largest German companies by market cap.
Both are considered to be crucial barometers of the global economy, and how they perform in the next few months will be closely watched as countries reopen their economies. Here’s what we might be able to expect.
To understand how Germany’s DAX index will perform in the coming months, it is important to understand how its components are constituted. As this DAX definitive guide explains in detail, the index is constantly changing depending on the fortunes of certain industries.
Given that some of the most significant economic casualties of COVID-19 have been the airline and hospitality industry, it should come as no surprise that such companies have been the first to go. The German airline Lufthansa finally got booted off the index for the first time, due to unprecedented revenue losses that have dealt a serious blow to the already-beleaguered company.
As a whole, it is worth noting that the DAX 30 has undergone a steady climb as the German economy has reopened, with its current total market cap now being close to the pre-crisis peak. This lends credence to the theory that the economic recovery, in Germany at least, will be ‘V-shaped’, with jobs, revenues, and profits bouncing back sharply.
The Dow Jones has always been a somewhat mysterious beast, even for seasoned economists. Many have believed for decades that this prestigious but limited index is not truly representative of the American economy at large, a line of thought that has gathered credence since the outbreak of COVID-19.
Despite the US experiencing its worst job losses in recorded history, with 20.5 million people out of work since March, and earnings declining at the fastest rate since the Great Depression, you wouldn’t be able to tell from the Dow. Despite a record fall in the early days of the pandemic, the Dow Jones has shot up almost continuously since then, with April and May seeing some of the largest one-day gains in history.
This is likely to continue in the coming months, as real economic activity begins to climb. It’s clear that investors also believe strongly that the recovery in the US will be rapid and strong, and this has clearly factored into the Dow.
However, it is worth noting that much of the economic fallout in the US is a lot more severe, systemic, and potentially long-term than in Germany. Wage losses, layoffs, and the dramatic fall in consumer spending could take years, if not decades, to recover from. Although the Dow might be optimistic for now, a big decline could arrive in 2021, as the reality of sluggish growth and ‘stagflation’ sets in.
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