8 November 2004
President George W. Bush has won another term in the US election. While his victory has generally been viewed as favourable for stocks, investors need to be aware of underlying economic trends that may have greater effect on markets, not only in the US but also in externally-driven economies like Singapore.
Wall Street generally prefers the pro-business Bush as president over challenger Senator John Kerry. And yet, how positively Bush's articulated policies will affect the stock market remains a question mark.
President Bush's penchant for tax cuts and his proposal to make the cuts from his current term permanent is a double-edged sword. In the short term, a tax cut stimulates the economy. In the long term, it exacerbates the Federal budget deficit. Investors will be well aware of both effects.
President Bush is generally viewed as more favourable toward free trade. During his campaign, Kerry had proposed to curb offshore outsourcing and review trade pacts with several countries. And yet, President Bush's pro-free-trade stance did not prevent him from implementing trade restrictions during his current term, most notably on imported steel.
However, perhaps most importantly -- and quite apart from whatever happens with the US presidency -- what must weigh on investors is the possibility that the economic cycle may be near its peak, if not already there. That, at least, is what economic indicators appear to be showing.
The index of leading indicators tracked by the Conference Board decreased 0.1 percent in September to 115.6, the fourth consecutive decline. While not quite signalling a downturn as yet, it clearly shows at least a deceleration.
The survey of purchasing managers by the Institute for Supply Management found a similar story. Its index of manufacturing activity fell 1.7 points to 56.8 in October, which still indicates expansion, albeit a slower one.
The jobs picture is mixed. On Friday, the Labor Department reported that 337,000 jobs were created in October, the largest gain since March. However, job-cut announcements by US companies hit 101,840 in October, according to outplacement firm Challenger, Gray and Christmas. Although slightly lower than the previous month, it was the second consecutive month that the number of jobs cut has exceeded 100,000.
Furthermore, the Department of Commerce's GDP report for the third quarter shows that the US personal saving rate has fallen to 0.4 percent, leaving little room for further strong increases in consumer spending. Indeed, the consumer confidence index tracked by the Conference Board fell to 92.8 in October, the lowest level in seven months.
If the US economy weakens, the rest of the world economy will inevitably be hit. That China raised interest rates on 28 October to slow its economy -- the world's other major growth engine -- only makes things worse.
The slowing economy is sending jitters in the semiconductor industry in particular. Semiconductor stocks throughout the world have been hit over the past few months in the face of growing inventories of chips. Last week saw both the Semiconductor Industry Association and IDC cut their chip sales forecast for next year -- to flat growth and a two percent decline respectively from 2004.
Singapore's highly externally-driven economy is already feeling the effects of the economic slowdown. Manufacturing output in Singapore grew 11.8 percent in September from a year earlier. However, on a month-on-month seasonally-adjusted basis, output shrank 1.2 percent.
Things are not likely to get better. A survey by the Economic Development Board on business expectations of the manufacturing sector for the fourth quarter of 2004 found a net weighted balance of 12 per cent of the firms expecting a favourable business situation ahead, weaker than the net weighted balance of 24 per cent recorded a quarter ago. And the Singapore Institute of Purchasing and Materials Management's index of manufacturing activity dropped 1.7 points to 51.5 in October, the lowest reading in 14 months.
In a report in the Global Economic Forum on 5 November, Daniel Lian of Morgan Stanley wrote that "the best days seem to be behind Singapore in terms of both the broad growth picture and domestic demand". Lian wrote that although domestic demand has been unleashed by the recent burst of economic recovery, it "looks set to go as quickly as it came when the economy moderates ahead. When that happens, the simultaneous retreat in consumer spending at home with a global demand slowdown will leave the economy recoiling from a double whammy."
The Singapore stock market has been one of the best performers in the world this year. Investors' confidence in Singapore has largely been justified by the economy's performance. Now, investors may want to start repositioning themselves for the economic climate ahead.
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.