People might be wondering what is happening. On Monday, headlines in the newspapers read “US may see double-digit jobless rate again”. Yet, on Monday, all Asian markets surged up, and the Singapore STI index broke 3,000 points very convincingly. Those who want to look for negative news will find no lack of these. However, increasingly, stock markets seem to be moving up in spite of the bad news. Why is that so?
One of the biggest reasons is that a lot of the bad news has already well publicized, chewed and worried over, and ultimately priced into markets already. For another big crash to happen, it would have to be something totally out of the left field and not what has been talked about for months already.
US slow recovery? That’s been talked about since 2009! Everyone was convinced it would be a W shape, an L shape, A U shape, but definitely anything but a V shape. So, actually, when the initially recovery looked fairly sharp, it caught people by surprise. Now that the momentum is slowing, investors get worried again. But this is old news. Few expected the US economy to go through a sharp recovery. Most expected a fairly slow one, so now that it is performing true to form, it should be no surprise.
The other big worry is about the Euro and Europe’s financial crisis. It started with Greece and swiftly spread to the rest of Europe. Extreme measures had to be taken. But things have stabalised now. The Euro is lower, governments in Europe are falling over themselves to show that they can be financially prudent, and the latest stress tests has restored some confidence that the European banks won’t have a collective meltdown. So, at this point, things would have to really blow up in a big way for Europe to plunge into another crisis.
China tightening was the other worry this year. This was not withstanding the fact that China’s economy was red hot and to prevent asset bubbles from developing, putting on some brakes was really needed. The Chinese government was right to order the banks to rein in lending, and to curb the property market. A lot of the measures are all in place, they have taken the edge off the stock market, and while the property market in China remains resilient, at least it has stabalised instead of going on a one way trajectory upwards into bubble territory. China has walked the fine line between too much economic growth and pulling back very well and I don’t expect China to be the region which might suddenly develop a crisis that would cause a reversal to the upwards trend we have been seeing.
The positive to all this is that while earnings have been strong since the year started, valuations are not much higher because the stock market itself, after going through the correction in May, has not quite rebounded to this year’s high yet. This means there is still more room for equity markets to move up. Also, I believe that unless it is something none of us expect, otherwise, there are few big issues I see in the coming months which would cause a market crash or disrupt the upward trend we are seeing now. All the biggest worries are well documented, covered and talked to death already. The market won’t be surprised by such things as US’s slowing growth, Europe’s financial troubles, or China tightening, and hence it won’t react to it in a big way.
On the contrary, I expect equity markets to slowly continue their upward rise over the next two to three months, and gathering steam towards the end of the year as investor confidence continues to rise. No further earthshaking bad news is good news. The same old concerns are also good news because they are discounted already. Asia economies will continue to recover strongly this year and the next even as the developed countries slowly pick up their feet. As investors come to the realization that strong growth can happen in Asia even with the developed countries dragging their feet, confidence will return to investors in a big way, and that is when the equity markets will take off.
In the meantime, be patient and don’t get too greedy as markets rise. But in the same vein, don’t panic every time there is some profit taking from some bad news. I am confident that we are in a rising market and as such, bad news that causes short term dips are great buying opportunities during such times.
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