It seems that almost day after day, week after week and month after month, stock markets around the world are either reaching for, or flirting with, multi-year and all-time highs. Some outstanding stock markets performers thus far include the Dow Jones Industrial Average, the FTSE 100 and India’s Sensex index. And at 3,300 points, our Straits Times Index (SGX: ^STI) is also toying with multi-year high. It would appear that there is no stopping the rise of global markets, as investors continue to pour money into shares. In fact, a recent report in the Financial Times has suggested that…
Some outstanding stock markets performers thus far include the Dow Jones Industrial Average, the FTSE 100 and India’s Sensex index. And at 3,300 points, our Straits Times Index (SGX: ^STI) is also toying with multi-year high.
It would appear that there is no stopping the rise of global markets, as investors continue to pour money into shares. In fact, a recent report in the Financial Times has suggested that central banks have become major players on world equity markets too.
A forward indicator
If you buy into the idea that stocks can be a forward indicator of an economy, then a strong market could suggest that better times may lie ahead. That is not too surprising given the inordinate amount of money that central banks have collectively magicked out of thin air.
The quantity of money that has been created through Quantitative Easing is estimated at more than US$10 trillion. That is more than the annual economic output of China. But the actual amount created could be considerably greater, if you include the other imaginative monetary easing schemes that central bankers have conjured up.
Some of that money has ended up on the balance sheet of global corporations. It is reckoned that companies around the world currently hold almost $7 trillion of cash and cash equivalents. Some of this money has been deployed in acquisitions as evidenced by the many corporate deals that have been announced.
Meanwhile, Japan’s economy grew by a better-than expected 1.6% in the first quarter, thanks to a surge in capital spending. In other words, Japanese companies are starting to spend some of their US$2 trillion cash-hoard.
Staying with Japan, Prime Minister Shinzo Abe has ordered a review of the way that the Government Pension Fund is to be invested. It is believed that the fund could be encouraged to buy shares rather than bonds with the US$1.3 trillion at its disposal. Elsewhere, China continues to confound sceptics by growing at around 7% this year.
The abundance of cash sloshing around the global economy and better growth prospects for both developed and developing countries could continue to push stock markets higher.
After all, if there are more buyers in the market than those who wish to sell, then prices are likely to rise. At present there doesn’t appear to be a shortage of buyers, which is probably why stock markets continue to inch higher. Another reason might be because there is nowhere else for the money to go.
However, that doesn’t help investors who might be suffering from stock-market vertigo. At the current levels, the US market is valued at around 15 times earnings; the UK market is valued at around 14 times earnings, while India is valued at almost 20 times profits. The P/E for Singapore shares is around 14.
It would appear that a fair amount is riding on companies being able to deliver the earnings growth to justify those lofty valuations. If they don’t, then there is a possibility that share prices might fall to reflect the lower level of profits that companies could make. In other words, stock markets may correct themselves.
If you are concerned about a correction, then you may have invested too much in the stock market already. In other words, a high exposure to risk does not suit your temperament. You should never buy shares unless you are prepared to invest for at least five to seven years.
Additionally, you should never invest more than you are prepared to lose. Peter Lynch once said that everyone has the brainpower to make money in shares. But he added that not everyone has the stomach for it.
He went on to say that if you are susceptible to selling everything in a panic then you ought to avoid the stock market altogether.
However, investing in assets that can beat inflation over the long term is paramount. The printing of money has effectively reduced the buying power of the dollar in our pockets. It is therefore important that you at least preserve or better still enhance your purchasing power by investing in businesses that have the ability to raise prices.
With that in mind, a stock market correction should be a seen as an opportunity rather than a threat. It means that you could buy more of what you wanted to own at a lower price.
History has shown that there are substantial rewards for investing regularly in the stock market. There are additional rewards for those who have the stomach to buy more shares when other investors are scared into selling.
Consequently, a retreat from current market highs should not be looked upon as a disaster but, instead, as a gift.
A version of this article first appeared in The Independent on Sunday.
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