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| Feeling the Pain of the Japan Market Crash. AP Photo/Junji Kurokawa |
Just as analysts around the world that the "Sell in May and Go Away" mantra is dead this year and that the global stock market will continue upwards unresisted, signs of a potential stock market carnage have materialized in the most likely of all places: Japan.
The Japanese stock market has fallen almost 15% in the past 2 weeks, after a blazing rally of more than 70% increase from November last year. However, due to the sharp drop in Yen, the returns amounts to no more than 18 over percent year to date in SGD. Some of the news sites called the one day 7% drop of the Japanese stock market on 23rd May "a perfect storm of negative news". First, weak economic data from China gave rise to the concerns that one of Japan's main trading partner will cause a slowdown in demand for Japanese goods. Than, came along the Ben Bernanke, who hinted that the US Federal Bank will start tapering its bond purchase program. The tipping point for the Japanese stock market is breached and the stock market went on to fall further.
Whatever is the reasons for the sell down for the Japanese stock market, one thing we know for sure: The stock market has rallied too fast, too much in a short span of 6 months. The Asian stock market trembled along with the Japanese equities earthquake, while the Western stock market held steady, until the last day of May. The US stock market fell 1.43% on the last trading day of May. A drop of 1% is pretty significant because the US stock market has not seen a fall of such "magnitude" in the last 6 weeks.
The small coordinated drop of the global stock market, may mark the start of a more significant correction, given that the stock market has rallied non stop since last year Nov. If this is indeed a significant correction, than it is the correction that we have probably been waiting for since March, when I swapped out a portion of our portfolio into bonds.
The Reverse Psychology of Good News
Given that most experts agree that the rumor of the tapering of the quantitative program by the US Fed the chief culprit that lead to the recent market rout, the market is currently actively looking out for news that will give hints if the Fed will really go through with the tapering, which may start as early as June this year. The condition for the tapering: Improving economic data and employment figures. Here comes the irony, whatever good news in the economy will now be seen as a bad news for the stock market and any bad economic data will translate to positive stock market action. The investors are practically praying for the economy to worsen, so that the Fed will restrain from rolling back their monetary policies.
It means that for every American that loses their job, the better off investors will be.
This oxymoron and dysfunctional reasoning of Wall Street may set off a chain of events that could lead to a significant market correction in the short term, but an improving US economy will certainly be a positive sign for the global stock market in the long run.
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| Jobless? Good for the Stock Market! AP/Paul Sakuma |
The Falling SGD and Bond Prices
The other significant impact of the Fed tapering rumor includes a sharp drop in global bond prices, as traders are worried that the tapering will lead to a rise in yield. Bond yield and bond prices operate in different directions. A rise in bond yield will lead to a fall in bond prices. The Singapore government bond is certainly not spared from the impact as prices fall. The SGD also fell sharply in the last few weeks, in what I believe to be, Hot money leaving the country as both the Singapore bond and equities prices fell much more than our peers in Asia. This could prove worrisome for our local investors as Singapore might have fallen out of flavor as international investors rotated out of Singapore to other countries in search of better returns. So, if you are planning for a vacation in June, get your foreign currencies exchanged soon!
Portfolio Strategy
I may start moving our reserved bond portfolio into the equities market should the market reacted in the way which I predicted. The correction may be sharp but shallow, as global investors are starting to get used to the idea that the bull market is back in force, especially after the trauma of the US and European financial crisis. There have been renewed inflow of funds into the balanced fund universe in the US, a sign that the average mum and pop investors are warming to the idea of the stock market again. A bit too late in my opinion as the big boys have already moved in, in force. The portfolio is lifted by our significant exposure to US, as it is still one of the best performing markets till date for 2013. However, our opportunity fund, which is invested in Singapore government bonds, have taken a short term beating as concerns for rising yields have led to a sell off. I am not too concerned as it is a pretty stable fund given its nature and we are NOT going to hold on for too long in this fund anyway, as the opportunity of a correction may kick in any moment.
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