German Stocks: The Higher They Climb, the Harder They Could Fall

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The U.S. stock market's run-up since a trough in March 2009 has dominated the financial news about equity values. But the story in Germany is more dramatic. The last year has been one of the best for German stocks, which have risen over 30% compared to 20% for the Nasdaq.

The reasons for the run-up are also the seeds for a fall. Germany is the dominant economy in Europe. Its exports grew more quickly that those in the rest of Europe, the U.S. and the U.K. as the recession ended. Germany's laws, which encourage companies to keep workers during a downturn, probably helped consumer spending. The country's national budget has kept its debt at a low 77% of GDP last year -- compared to Japan at 192%, Italy's 115%, and Greece's 108%.

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Germany, however, faces headwinds unlike any it encountered during the recession -- and they could trigger a setback for its economy and stock market. The country is No. 50 on the list of national oil reserves. A sharp rise in the price of crude could undermine consumer confidence and industrial output. Germany's export growth could also be hurt by the lack of a strong economic recovery in the U.S., very slow GDP growth in Japan and a Chinese economy that's beginning to be challenged by rising inflation.

Germany is also the "bank" for Europe. If the economies in Portugal and Spain falter, Germany may be called on to put more money into any EU bailout facility. That, in turn, could raise its national debt.

The rise in German equities has been breathtaking. That means it won't take much pressure to bring them down.
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