Standoff between bulls and bears
17 November 2003
The world's economies may be on the road to recovery but financial markets do not appear to be too impressed.
In the US, the Standard & Poor's 500 was not able to break past 1,060 over the past fortnight, peaking at 1,059.02 on 3 Nov but falling for seven of the following nine sessions to end last week at 1,050.35. The Nikkei 225 fared even worse, closing last week at 10,167.06, near three-month lows. And in Singapore, the Straits Times Index has been stuck in a range of between 1,700 to 1,800 for more than a month.
While it is by no means clear that the bull market in equities has ended, there appears at least to be a temporary stall.
Economic growth in most countries have been strong. On the back of the 7.2 percent annualised growth rate reported for the US economy in the third quarter, Japan saw its economy grow 2.2 percent on an annualised basis for the third quarter. Stock market bulls point to these growth rates as justification for further gains in stocks.
Bears, however, question the sustainability of such growth rates. For sure, the US economy will slow down. A Wall Street Journal survey of 53 economists showed, on average, a prediction of four percent growth in the fourth quarter of 2003 and 4.1 percent growth in the first quarter of 2004. That pace, the survey found, is likely to hold at roughly 3.9 percent for the remainder of 2004. Beyond 2004, things look murkier, but with the effects of pre-election fiscal stimulus in the US largely dissipated by then, economic growth is likely to slow down further.
Such slowing economic growth suggests that there may be little upside potential left in equity markets, bearing in mind that stocks usually peak about six to nine months before the economy. Stalling markets may reflect selling by long-term investors who prefer to take profits early. For example, insiders have been actively selling stocks for the past few months. On the other hand, short-term traders may want to squeeze out whatever upside potential there is left and buy up the stocks that are being abandoned by their long-term brethren. This helps keep the stock markets from keeling over altogether.
So the current standoff between bulls and bears may be merely reflecting the different time horizons of different groups of investors. That does not necessarily mean that the longer-term bearish view will be the next one to prevail. Remember that markets often overshoot. As the economic recovery becomes firmer, late bulls may yet jump into the markets, giving them one last push. And if that push turns into a frenzy, the last stage of this cyclical bull may yet prove worthwhile to ride out.
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