Carnage on Wall Street
24 July 2002
The accounting scandals on Wall Street have exacted a heavy toll on US equities. On 23 July, the Dow Jones Industrial Average closed at 7.702.34, down 23 percent for the year, while the Standard & Poor's 500 Index closed at 797.70, off 31 percent for the year. Many observers have suggested that we are seeing signs of capitulation among investors, an indication that the US stock market may be hitting bottom as all bears finally exit the market.
That conclusion may be somewhat premature. Apparently, many analysts, at least, have not capitulated yet, even after the recent falls. In a recent note to clients, Jeffrey Applegate of Lehman Brothers lowered his year-end expectation for the S&P 500 to 1,075 from 1,200, suggesting a 35 percent jump from the 23 July close. Banc of America Securities' Thomas McManus lowered his 12-month target for the S&P 500 to 1,000 from 1.150, suggesting a 25 percent rise from 23 July. Inevitably, it is the never-say-die bull, Abby Joseph Cohen of Goldman Sachs, who gives the most optimistic forecast, with an S&P 500 value of 1,300 by year-end or a surge of 63 percent from 23 July.
Of course, not everybody is so sanguine, Some of the economists at Morgan Stanley Dean Witter have been particularly pessimistic. Chief economist Stephen Roach has been warning about a possible double-dip in the US economy for some time. And on 22 July, Andy Xie suggested in the Global Economic Forum that the S&P 500 could drop to 800 if reported corporate earnings are reliable, to 625 if they are not, and to 515 if sentiment is particularly depressed.
The S&P 500 is probably trading at a forward P/E ratio of around 15. If that seems low by recent standards, it only shows how overvalued US equities have been. 15 is generally regarded as the long-term average P/E for the US market. So at current levels, even if the earnings estimates on which the P/E is based proved reliable, the US market is not quite at bargain levels.
The Singapore market is probably also trading at a forward P/E of around 15. But whatever analysts may think about the prospects for US equities, a 20-plus percent rise in the Straits Times Index by year-end from its 23 July close of 1565.72 seems unlikely. A year-end STI level of around 1,800, though, appears reasonable. This would bring it about 15 percent higher than the close on 23 July, and around its high for the year to date of 1,808.41 achieved on 19 March. It would also bring its P/E to around 18, which is low compared to the historical range, but probably reasonable going forward in view of slower future economic growth for Singapore.
While fundamental factors are reasonably favourable, technical indicators appear less so. The Singapore market has fallen for six of the last seven sessions, and is down 3.6 percent for the year and 13.4 percent from the year high. On the other hand, the Singapore market is showing some relative strength. While the US market is making multi-year lows, the Singapore market, like most other Asian markets, remains significantly above its 2001 low. Yesterday's strong rise in most Asian markets, despite Wall Street's continuing carnage, is testimony to these markets' relative resilience.
However, it would be foolhardy to assume that the Singapore and Asian markets are poised for a bull run. With the current volatility in global equity markets and economic uncertainty, these markets may see quite an extended consolidation phase, and even test new lows for the year. Confirmation of a new up cycle may not come until next year.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.