Rightfully speaking, no one expects the US indices to climb back to 2900 levels in such a short time since the pandemic caused the market to crash. In fact, we are at best, at the peak of the first wave of COVID-19 infections in the world. Also, economic data of major economies are basically horrendous and in normal circumstances, it should have led to a major downturn. Instead, the US market reacted oddly and rallied in positive expectation of another substantial stimulus.

These decisions by governments and reactions demonstrated the artificial resilience of the market which has brought many bearish investors to their knees. Though there will still be volatility in the horizon rather than a continued rally, STI seems to have found support formed during the last 2008 recession. After all, the stimulus can only alleviate the problems caused by the pandemic. In this post, we will share some insights on why we are observing a “bullish” situation when it was “supposed to be” a bear market.

Governments do not practice restrain on money printing anymore

Compared to the past, Governments today are more liberal when it comes to mobilizing their central banks to pump liquidity into the market. At the same time, the methods of channeling funds to necessary areas of the economy have also drastically improved due to digital technologies and banking. As such, central governments are able to provide much-needed relief to businesses that should not have failed if not for the pandemic. That said, printing money is not for free, because the national debt of those nations will continue to weigh on the country’s GDP growth due to interest payments. However, since most economies are doing the same, the result might not be such a bad thing for the near term. In fact, investors do expect spending to increase sharply once the lockdown measures are removed, leading to higher revenue and therefore net profits for subsequent quarters, not to mention the new loans taken up at a much lower cost.

Market recovers before the actual crisis dissipate

This segment might lead to many debates because many bearish investors would argue that it took 189 days to reach the trough. So in other words, it boils down to perspective. My perspective is to try and buy near to the trough rather than waiting for the entire U-shaped cycle of the crisis to end. (This is regardless of the shape of recovery) In retrospect, many have seen the trough of this downturn on 23 March 2020 and expects the market to retreat to those levels again. Without second-guessing, I would say that accumulating in tranches now would not be such a bad idea.

STI has returned to the same support formed during the 2008 financial crisis, this valuation is fair after 12 years of Singapore’s economic expansion and profit-making by companies in STI. Though some companies might not have performed as well as one would hope, these accumulated EPS would have increased the NAV and thus increasing the market price proportionately to P/Bv accordingly. Not forgetting the decrease in interest rates since 2008 and inflation of our currency that has caused the attractiveness of saving money in time deposits and government bonds to fall significantly. Hence, we can take comfort in the fact that this support could be a legitimate fair value for STI. Do check out our weekly STI market outlooks if you are interested in the latest follow-ups on STI’s Technical Analysis.

Equities have become the “new safe haven” for cash

Looking at the 10-year yield on US T-Bill (0.709%) and German Bund (-0.53%) at the time of writing, you would have realized that those safe havens that countries and investors rely on decades ago are no longer a legitimate source for returns. Not to mention that the European and Japan’s Central Banks have somewhat embraced long term negative yields for their government-backed securities. As such, saving cash is no longer as attractive in traditional forms of investments. As we all know, as share prices go up, distribution (dividend) yields will continue to fall but at least, these companies are known to be productive and their financial standings are publicly available and regularly updated. In other words, investors might trust individual companies that are performing decently rather than state governments who are less accountable when it comes to debt repayments and defaults. I argue that in years to come, stock yields will fall drastically as share prices climb and that will most likely be the new norm.

Closing Thoughts

Though we are unsure why the market continues to rally despite poor economic data, we are sure that countries are reluctant to let their economies fall and let others continue to “thrive” in the near term by printing massive amounts of money to support and stimulate their economy. Putting government debt aside, this “irresponsible practice” of kicking the can down the hill by printing money has become the new norm for most major economies to sustain their businesses and citizen’s lifestyle. Could this be the end of relying on commonsensical knowledge of performance and price or are we anticipating a severe negative reaction in years to come?