Hope for at least some short-term gains for equities
30
November 2002
We are entering the last month of the year, a traditionally profitable investment period for stocks. Past stock market performances at this time of the year have often been good. However, prospects are highly uncertain this time around.
In the 14 years from 1988 to 2001, the Morgan Stanley Capital International (MSCI) Singapore Index has risen by an average of 0.4 percent a month. Decembers have averaged 5.1 percent over this period, reflecting an excess return of 4.7 percent.
January, another traditionally good month in many other stock markets -- notably the US -- has been less profitable for investors in Singapore. Over the same 14 years, Januarys have, on average, seen the MSCI Singapore rise by 0.3 percent, essentially the same as the average month. One reason could be that tax-loss selling, the main reason for the so-called January effect in the US, is less of a factor in Singapore, where capital gains are usually not taxable. The other reason could be that the January effect is simply too well known and has been arbitraged away.
In any case, past performance is no guarantee of future performance. Prospects for the stock market are currently clouded by the weakening economy. Last week, the Ministry of Trade and Industry (MTI) lowered its forecast for growth in Singapore's gross domestic product in 2002 to 2 to 2.5 percent from 3 to 4 percent previously. Like many others, MTI economists had underestimated the headwinds being faced by the global economy in a post-bubble, deflationary world. That is hardly surprising, since such circumstances occur only once in a lifetime, and has never happened before in post-independence Singapore.
The question, as always, is whether the stock market has fully discounted the weakening economy. According to the MSCI Singapore Index, the market has declined by 24.4 percent over the past eight months. Obviously, the market has anticipated the weakening economy, even if the MTI had not. Notably, however, the market has stabilised over the past two months, and at 172 at the close yesterday, is up 3.9 percent from its low of 165.59 on 25 September. The US stock market has done even better, with the Standard & Poor's 500 Index rising by 20.5 percent from its low of 776.76 on 9 October to close at 936.31 yesterday. This suggests that the economy may stabilise or strengthen in the first half of next year. But where does it go from there? And more importantly for stock investors, where does the market go from here?
Short-term uptrends within a longer-term downtrend -- often called bear-market rallies -- are not uncommon. The questions are whether the current rally is the start of a new secular bull market or just a bear-market rally, and if the latter, how long will it last. Stock market experts in the US have not been short of opinion on these questions.
Steve Hochberg, chief market analyst for Elliott Wave International, pointed out earlier this month that the bear-market rallies from April 1930 through July 1932 is "the yardstick that we measure this post-bubble market by". During the 27-month span that began in April 1930, there were seven major bear-market rallies. "The average rise was 24 percent and the average duration was 40 days," Hochberg said. "So by this one standard, the current bear-market rally is short in both size and duration."
Richard Russell, editor of Dow Theory Letters, says rallies such as the October-November one are best left to nimble traders. "I don't think the average person should be in the stock market at all," Russell told a group of investors at the New Orleans Investment Conference earlier this month.
Not everyone is so pessimistic. Yale Hirsch, writing in the Stock Trader's Almanac, thinks that the October low may represent the bottom. Yale sees some similarity in the situation today to the situation back in 1974. Back then, stock markets around the world had crashed on the back of soaring oil prices. Yale correctly called a bottom in December. Thereafter, the US market rallied 52.7 percent to its July 1975 high.
Hirsch also pointed out that from 1950 to 2000, stocks in the Dow Jones Industrial Average achieved a 15.5 percent annualised return between November and April, far outpacing the 10 to 11 percent return achieved over the course of the entire year.
Other strategists show the same optimism at least over the near term. Joe Battipaglia, chief market strategist at Gruntal & Company is forecasting a rosy Christmas and New Year for investors: "I think that overall we're going to see strong gains for stocks at least through January." Toby Lefkovich, Salomon Smith Barney's chief equities strategist, has a year-end S&P 500 target of 1,000.
In Merrill Lynch's Global Research Highlights report published on 22 November, chief market analyst Richard McCabe stated that "the 2000-02 bear market is in a cyclical bottoming process that will lead to a cyclical bull market in 2003-04. That so many observers are calling the recent upturn a bear-market rally may be a good sign from a contrary opinion standpoint." Elsewhere in the report, however, director of research Steven Narker remarked that although valuations have come down, "they remain high"; based on the past 12 months' earnings, "the S&P 500 has a P/E of about 33".
For the Singapore market, The Edge Singapore interviewed Steve Goh of ewavetrader.com, and Daryl Guppy of guppytrader.com for its 28 October issue. Goh, who uses the Elliot Wave theory, told The Edge Singapore that the Straits Times Index for the Singapore market will hit 1,849 next year, with 1,326 having been a major bottom. Guppy said that the market is likely to do well around the end of the year, but suggested selling before the Chinese New Year.
Recent economic data from the US provides some cause for optimism, at least for the near term. The Chicago Purchasing Managers' Index rose to 54.3 in November from 45.9 in October. Orders for durable goods rose 2.8 percent in October, the biggest gain since July. Even more encouraging, core capital goods orders (excluding both defense goods and civilian aircraft) rose 5.3 percent in October.
So opinions on the prospects for the stock market are highly mixed. Prudent long-term investors may want to sit out the current market rally, but nimble traders may be able to enjoy the year-end ride.
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.