Master Rider Blog

One Last Leg

November 13th, 2007 NW Teong

The recent carnage in the global stock markets has investors all over the world asking this question: “Are stock markets turning bear already?” To answer this question we again need to separate US markets and rest of the world. From macro point of view, we know that US economy is slowing down, plagued by housing and financial problems, weak dollar, inflationary pressure and so on. This contrasts starkly with rest of the world economies, especially those emerging countries which are still enjoying healthy growth. Hence, being the leading indicator of the economy, their respective stock markets should reflect that macro picture. Of course, the key problem is that the stock markets at times over-reflect that positive big picture.

My personal view is that the recent correction in the stock markets is almost done and we are likely to see the last leg of bull soon. As explained before, this last leg of bull could last any where between two months to eight months. My gut feel is that we could have a severe market crash in October if not for the preemptive move by US Fed to cut its Fed funds rate aggressively. I cannot imagine the impact on the stock markets if the combination of bad news such as the subprime loan crisis, record high crude oil price (near US$100 per barrel), weak dollar and so on had occurred in Oct instead of Nov. My bet is that if all these events were to happen in Oct, we might have a big crash similar to the magnitude of the Black Monday crash in 1987. Bear in mind that investors are extremely “fragile” and hence could become panicky on any slight negative news in the month of October. I am not superstitious but this is merely human psychology. I am sure when US Fed cut the interest rates aggressively in September and again in October, avoidance of a crash in stock markets in October is surely one of the key considerations. A severe crash in the stock markets would have a dire impact on the real economy. However, that doesn’t mean Fed’s job is done. In fact, it has more challenging job looking forward.

While short term rebound is not too far away, one key question we have to ponder over is this: “Can the emerging markets continue to surge when US markets are declining? My take is that, a gradual slowdown in US economy is fine for other economies as the emergence of China, India would be able to offset the slow down, however, a drastic slowdown or a prolonged period of slow down in US would have a negative impact on other economies. While the emergence of China, India and other emerging countries have offset some of the influence of US, US is simply still the largest economy in the world today. At this juncture, we are likely to be in scenario one, i.e. US economy is slowing down gradually and hence emerging markets should be alright so long as the giants such as China and India continue to grow at a healthy pace.

With the above in mind, I shall plan my investments / trades accordingly to take advantage of a rebound soon. Cheers!

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Entry Filed under: US Stocks, Macro, Stocks, Singapore