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A Look Back At The Market A Year Ago And The Lessons We Can Learn

Just look at how big a difference there is between the financial markets of a year ago and that of today.

In February 2016, the markets were in panic mode. There was a huge sell-off in many stock markets around the world, including that of the US, that started in October 2015. In Singapore, the Straits Times Index (SGX: ^STI) fell by over 15% from October 2015 to February 2016.

However, during that period, the US – the world’s largest economy – was producing positive economic data. Its unemployment rate was low, its economy was improving, and its central bank, the Federal Reserve, even raised interest rates in December 2015. And as we’ve seen, the financial markets were acting in a different manner to the economic data produced.

Fast forward to today and we can see a different kind of mismatch between the economy and the stock market.

We now live in a world where populist politicians have gained or are gaining power among some of the most powerful nations in the world. There is a threat of trade wars erupting. And, uncertainty is on the rise regarding the long-term effects of Brexit on the European Union.

Stock markets all over the world, meanwhile, have been on a rally. In Singapore’s case, the Straits Times Index has jumped by more than 10% from October 2016 to today.

What can we learn from these two examples?

Firstly, it is quite clear that the performance of the stock market has little in common with the state of the economy. Investors who want to use economic data points to predict what stock markets would do may be very disappointed over time.

Secondly, we can see on hindsight that the pessimism of the market in early 2016 was a great buying opportunity for investors. Most global market indexes ended 2016 with great performances. Although the Straits Times Index ended 2016 mostly flat, it has actually rallied by more than 20% from its 2016-bottom to today.

So, the question we have to ask ourselves now is this: Is the current optimism of the market overdone? If it is, does it mean we are looking at a market correction in the near future?

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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 contributor Stanley Lim does not own any company mentioned above.