As nations and economies continue to reel from the effects of the COVID-19 pandemic, some are earning praise for the ways in which they have responded. One such country is Germany, which has been lauded globally for its approach in mitigating the health, social, and economic threat posed by the pandemic.
The country boasts some of the lowest death rates from the virus in the world, as well as relatively few job losses thanks to extensive business support and a furloughing scheme put in place by the country’s finance ministry.
However, this has not been enough to stem the economic impact, with German manufacturing output shrinking significantly this spring amid a lockdown that has likely caused the most severe contraction on record.
Despite this, German stocks have undergone an unexpected and unprecedented rally in recent weeks. Let’s take a closer look to see whether or not Germany’s much-feted response to COVID-19 has helped or hindered the German stock market.
How Have German Stocks Fared so Far?
If one was to look at the performance of the DAX 30, a stock index of the largest 30 companies in the German economy, it would be fair to assume that the lockdown measures put in place had a decidedly negative impact on share prices.
The index dropped by more than 30% between February and March of 2020 which, as the comprehensive DAX historical data shows, is almost on par with the losses seen during the aftermath of the Dot Com Bubble in 2003 and the Great Recession in 2009.
The most significant losses were seen among DAX components that were most directly impacted by the German government’s COVID-19 response, such as the airline Lufthansa and manufacturing companies that were intensely vulnerable to disruptions in global supply chains, such as BMW.
However, despite those chaotic early days, a recovery in the stock market is now underway that few people could have predicted back in March.
What Does the Future Hold?
Although Germany’s economic recovery will likely be a long and painful road, the stock market seems to be very optimistic. The DAX 30 index has rallied immensely since Germany began reopening the economy in May and is now rapidly approaching its pre-COVID market cap, with trading volumes up 168% over just two months.
The fact that this unprecedented market rally is occurring despite dire warnings over the current economic situation in Germany is reflected elsewhere. In the US, despite record job losses and one of the worst contractions since the 1930s, the Dow Jones Industrial Average has soared in recent weeks and is similarly close to its pre-crisis levels.
This would seem to suggest that the COVID-19 response of Germany, which differed vastly from that of the US, has had very little bearing on the stock market. The current rally seen in the DAX 30 index and the Dow Jones cannot be explained in a straightforward way. One thing that is certain is that investors on both sides of the Atlantic are confident that, once the current crisis has passed, the economy will promptly snap back and that growth rates will be strong.
On a more cynical note, this also suggests that perhaps stock indices such as the DAX 30 and the Dow, which only measure the performance of the top 30 companies in each respective country, are perhaps not the best resources for measuring the real economy.