Authors: Konstantinos Mamais, Kleanthis Karvelas

Title: 'Feeling Good' as a Guide to Performance: The Impact of Economic Sentiment in Market Performance for Germany

Abstract

During and after the financial crisis of 2008 the economic sentiment indicators for Germany sky-rocketed, reaching new historical maxima. The effect of "safe heaven" country that Germany exhibited during the crisis and the resulting numbers for economic sentiment pose the question as to whether economic sentiment can be used to improve the positioning on the German financial market. Although there have been previous studies that link economic sentiment with financial markets, our focus on Germany is well justified for many reasons: after the 1990's Germany has shown a consistent growth focus with emphasis on exports and on enlarging its economic share within the EU and abroad, but also with a focus on strict fiscal discipline. The impact of such policies was clearly revealed during the crisis and after and therefore it becomes a question of practical interest to see whether the reflection of economic policies in the economic sentiment indicators can be linked to the performance of the German market. We perform a careful sample-split analysis of both the characteristics of sentiment and market performance in various sub-periods from the 1990's until today and also use economic sentiment as a guide for timing the German market. Our results are consistently the same across sub-periods: using economic sentiment as a signal to invest in the German market outperforms the simple buy and hold benchmark and provides excess returns that can possibly be explained only by Germany's stellar economic performance all these years.