Wars, terrorism, coup d’etat and the stock market

We received several inquiries last week regarding the possible impact on the stock market of the newly uncovered but thwarted terrorist plots in the UK. The obvious answer is that this will weigh down on market sentiment for sure. But then again, this is not the first time that the world will be dealing with a (potential) non-economic catastrophe. In our article entitled "Resilience of Markets" (see Philequity Corner, July 24, 2006), we pointed out that markets have generally been resilient and have always found basis to recover. In other words, catastrophes have never had a lasting impact on the markets.

On the local scene, the stock market has also learned to cope and recover from major political disturbances and coup attempts (see "Failed coups & the stock market," Philequity Corner, Feb. 27, 2006). For those who missed the mentioned articles, you can retrieve them from our website www.philequity.net or in Yehey!’s Finance Channel at www.yehey.com/finance.

Ripples on a pond

What do these tell us? They indicate the growing resiliency of the market which, in most cases, recovers after only one week after the event. Also, they show that the impact of such events have been less severe when compared to the effect a decade ago.

On a broader view, these catastrophic events and disturbances served as momentary distractions to what is really a term-trend or outlook. They can either exacerbate a bear market or disrupt temporarily a bull market. And since they cannot be predicted, they can also throw off the inexperienced or the uninformed investor who is not aware of the broader view.

Focus on the fundamentals

What is more important (and this is what we often emphasize to those seeking our view) are the underlying economic and corporate fundamentals because they serve as maps or guide to what the longer term outlook would be. After all, investments should serve a long-term objective so it is just prudent to know what’s in store in the foreseeable future.

In the case of the Philippines, we still take a positive stance as far as its economic fundamentals are concerned. We are not as vulnerable anymore as we were two decades back when both man-made and natural disasters were taking heavy tolls on the economy.

Furthermore, we take comfort in the strong commitment of the Arroyo Administration, particularly the economic managers, to economic and fiscal reforms. Time and again, it has sacrificed popularity for doing what is economically prudent. Our level comfort is raised further from knowing that at the forefront of the country’s economic management are President Arroyo and Finance Secretary Margarito Teves who took the legislative lead in sowing the seeds of reforms in the 1990s.

US Fed pauses, stock market pauses

The US Fed finally stopped hiking rates on August 8 (Tuesday), but maintained its strengthening bias because it is still uncertain about the inflation outlook. As the Fed paused for the first time (after 17 consecutive quarter point increases since 2004), US equities likewise took a breather. The Dow Jones Industrial Index (DJIA) has pulled back 95 pts or 0.85 percent from its closing price prior to the Fed announcement. This is a classic case of "SELLING THE NEWS" in stock market parlance as the market has anticipated the move and has already rallied by almost four percent in the three weeks prior to the Fed meet..

From inflation scare to growth scare, investors are now both concerned whether the Fed has tightened too less or too much. Core inflation (ex-food & energy) continue to edge up with the June figure hitting 2.64 percent – the highest since 2001. Meanwhile, the economy is showing signs of softening with the housing market slowing down and threatening the US consumer.

The National Association of Home Builders (NAHB) Housing Market Index declined to 39 last in July, the lowest since December 1991. Readings below 50 mean that more builders view sales conditions as poor. In the past, the NAHB Index has been a reliable indicator of expansions and contractions in the US economy.

Markets, indeed, are taking a breather. Even here in the Philippines, the benchmark PSE Index dropped slightly week-on-week by less than a percent, following a 16.1 percent rally from its low in June. This is not surprising as the recent resurgence in terrorism concerns served only as an added factor to take profits. However, these should not deter any investor to look at the broad strokes. Abroad, the decision of the US Fed to pause from further tightening only prompted investors to examine deeper the US economic prospects. We should do the same. And as far as Philequity is concerned, barring any unforeseen global catastrophe, the Philippines offer one of the most credible stories for long-term economic momentum and rebound.

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