Cheerless stock market a cause for worry?

SINGAPORE - In recent days, the headlines have become gloomier and gloomier, as we grapple with a host of worries starting with the increasingly fractious US presidential elections now less than one month away and the prospect of an economic slowdown in our own backyard.

As such, I get plenty of queries from concerned investors on what they should do about their shareholdings: Should they sell out of everything and hold cash until things are more settled?

In replying to them, I find myself quoting the great investor Sir John Templeton quite often: Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.

Certainly, I find plenty of scepticism around me. But I find no signs of any euphoria at all - the type of exuberance that takes grip when investors blow caution to the wind and propel share prices to unrealistically high levels.

Even though the benchmark Straits Times Index has stabilised around the 2,850 to 2,900 point level for months now and blue-chips are trading well below the high levels which they achieved last year, few investors are dipping their toes into the local stock market. Stock market turnover has slipped below the critical S$1 billion support on many trading days.

The same can be described of other regional markets. In Hong Kong, as much as HK$200 billion (S$35.7 billion) of shares changed hands daily in April last year. That has fallen by two-thirds to just HK$67.8 billion in the first nine months of this year.

One way to know that the bull market is ending is when most investors turn "irrationally exuberant" as former US Fed chairman Alan Greenspan once put it.

But we seem to be stuck in a rut, with our blue-chips grinding at around the same prices they have been stuck with for weeks. This is not exactly a cheerful market.

One reason for the cheerlessness among investors is the US election as two extremely unpopular candidates - Hilary Clinton and Donald Trump - run against each other to get into the White House. It seems difficult for investors to escape that sinking feeling of being caught between a rock and a hard place.

Wall Street and the rest of the world seem to have priced in a Clinton victory at this point.

For whatever it is worth, this means that the world's No.1 economy will be looking at policies which will not be drastically different from those of the incumbent president, Barack Obama. Markets like certainty and Ms Clinton represents the status quo - or certainty.

With Mr Trump, the dread is so pervasive about him clinching victory that some articles read like it would be financial Armageddon if he were to enter the White House.

Unlike a Clinton victory, a Trump victory would create a lot of uncertainties - and since markets don't like uncertainty, a Trump victory may produce a Brexit-type sell-off.

Is that bad for investors? Not necessarily. Going by the Brexit analogy, there should be a market rebound after the initial sell-off.

Apart from concerns over the US elections, investors seem to fear evil at every turn.

Just scan through the financial news on any given day. Chances are that you will get a predictable slew of dismal headlines warning about economic slowdown in China, poor corporate earnings outlook, the woes afflicting global lenders like Deutsche Bank.

The dreaded "R" word - which stands for recession - keeps slipping into the news as well.

However, my gut feel is that stocks will will simply plod along as the risks have been priced into the market already.

But the cheerless state of the market, as investors grapple with gloomy news like a slowing economy, is likely to put the lid on any upside in share prices for now.

Before you sell everything and run for the hills, it may be worthwhile bearing this in mind: Timing a big event like the US presidential election is going to be tough.

Not only does your analysis have to be right, but you also have to predict how the market prices in that analysis.

Unless there is a big, bad, unexpected surprise which we haven't taken into account of, it is difficult to envisage stock prices falling in a significant manner.

engyeow@sph.com.sg