Why the stock market is up, IMHO (part 2)

By Randell Tiongson on August 16th, 2009

..con’t. (Part 2)

Let’s simplify this. Because of the fears of losing money brought about by the crisis, the preference for safer havens increased the demands for fixed income securities. Price of said investments has an inverse relationship with yield – so as price increases, yields go down. Yields of such ‘safe’ investments have plummeted to a point that they are starting to be very unattractive and are forcing many to look elsewhere. Central Banks all over the world are keeping interests down to keep money circulating in the economy so we can’t see any improvement in the yields of new fixed-income securities as well. All these makes investors go out and look for avenues where they can get better performances.

At a certain point when the markets are too liquid, money needs to be invested, otherwise money will actually lose value because of inflation. Staying out of the equities market is a knee-jerk reaction to cut losses when things become awry. However, it can’t be expected that people will totally forget about the market as they are just waiting for signs of some recovery before they start taking positions. The question in my mind is, are we really seeing recovery? The US equities market has seen a remarkable 30% increase from its lowest point and thereby also having a positive effect in the Philippine market. Is this a sign that the stock market is in full recovery? Only time will tell. It’s not that I am sceptical; I pray every day that we see some recovery and eventually growth. But we need to look at things from a more prudent perspective. Here’s the FACT: the global economy crashed and is in recession. The damage is so severe that it will take time for institutions to heal and recover.

I maybe reading too much into things but here is a thought that occurred to me — can it be that one of the reason why there is action in the stock market is that people are seeing that inflation will shoot up soon?  Equities are a good hedge against inflation, much better than the safer fixed-income securities (well, at least in theory). A high inflation is not a remote possibility; it’s actually a very real one. With the way governments are pumping money into the economy, it puts a lot of pressure on inflation. Are people speculating too much, too soon? I don’t know, maybe. Is it time to start investing in the stock market again? I’m not sure; I wish I knew the answer to that too.

I will stick to my rules before letting go of my money (if I had any): Investment Objective, Time Frame, Risk Tolerance and Acumen. There is also a view that the market is now ‘over-bought’ so there is an expectation of some correction. If you have invested in the market you can do two things, get your profits and leave or just leave your money there and wait for the market to recover – it will definitely recover, we just don’t know when. I am not a technical guy and I’m not a big believer of timing the market so you know what I would do if I have money in the market.

Well, just to remind people that all these are just IMHO (In My Honest Opinion) and HTH (Hope This Helps).


2 thoughts on “Why the stock market is up, IMHO (part 2)”

  • Most recessions in the past were double dip. So we will most likely see another dip in the near future. Then after that, a recovery would probably be signified by blue chips giving higher than average dividend yields indicating that they are actually making more money that what the market is valuing them for. IMO.

  • New York University Prof. Noriel Roubini, who predicted the recession, is also inclined to a W-shaped recovery (double dip).

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Why the stock market is up, IMHO (part 2)