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What’s Next For The Stock Market After A Poor 2015?

By now, most (or at least some) investors would have known that 2015 has been a bad year for Singapore’s stock market thus far. As of yesterday’s close at 2,816 points, the Straits Times Index (SGX: ^STI) is down by 16% from the end of 2014.

This may generate some fear among investors that 2016 will be another bad year. After all, we as humans tend to suffer from the recency bias, a psychological phenomenon where we place undue emphasis on recent events without consideration of long-run odds.

Any such fears may be unfounded. I’ve taken a look at the Straits Times Index’s annual performance since 1993 and plotted the table below:

Straits Times Index annual gain table
Source: S&P Capital IQ; author’s calculations

Cells in the table are colour-coded for easy reference. Green is used for the years when the Straits Times Index has gained more than 10% while red is for the years when a loss of more than 10% has occurred. The uncoloured cells are for more pedestrian years when the index had made returns of between 10% and -10%.

As depicted in the table, stocks in Singapore have done very well as well as very poorly in the year that follows a bad year. In other words, what the market has done can’t tell us much about what it’ll do next.

So, instead of fretting about the market’s returns in 2015 thus far, it may be more useful to focus on the value of stocks and to think long term, instead.

At the start of December two weeks ago, when the Straits Times Index had closed the day before at 2,856, which isn’t too far from where it is now, I had looked at two important ways to gauge the market’s value.

Back then, the Straits Times Index had a price-to-earnings (PE) ratio of 12, which is lower than its long-term average PE of 16.9 in the 37 years from 1973 to 2010. This suggested that stocks were not expensive.

The other valuation measure I used looks at the number of stocks selling for less than their net current asset values (such stocks are known as net-nets). The more net-nets there are in the market, the cheaper the market is.

The net-net measure pointed to a similar conclusion as with the PE ratio: The number of net-nets is near the highest it’s been since the first-half of 2009, when the stock market bottomed out during the Great Financial Crisis of 2007-09.

How cheap or expensive stocks are at the moment can’t help you with making short-term investing decisions. But, the odds of success are in your favour if you buy stocks when they’re cheap and hold them for the long-term. That’s why I mentioned earlier that it’s more useful to focus on the value of stocks and to think long term.

For more on the valuation work: Check out here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.