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Santa's rally bears gifts for the underdog

Prottoya Chowdhury | Published: February 08, 2019 20:38:40


The week before Christmas, the holiday smiles and laughs on the faces of investors were wiped off clean and replaced with an expression of financial perdition. All across the world, investment bankers, traders and hedge fund managers sat at their desks in dismay, their eyes fixated on lines which further continued their paths downward- the decade long bull run had come to an end and gone with it were aspirations of a pleasant holiday complemented by bottles of expensive champagne. Throughout the week of financial hell, the Dow Jones Industrial Average (DJIA) had shed an eye-watering 6.8 per cent, followed by the SP 500 at 7.0 per cent and the NASDAQ composite at 6.2 per cent; panic was the element that dominated the minds of investors and traders that week as shares flooded the markets. In spite of the countless statements from the leading minds in the investment world, the US equity markets failed to stage a 'holiday season' rally, an uptrend throughout the equity markets that encompasses most sectors and generally occurs during the months of December and January. Many of the best known analysts had been arguing that investors, consumed with fear caused by the capricious nature of the equity markets, were overlooking the strong economic backdrop of the US. In fact, throughout the latter half of 2018, US employers had added more than 200,000 jobs per month for four out of the six months; to complement these growth figures, US unemployment rates have held themselves at a 49-year low of 3.7 per cent and wage growth is at the highest level since 2009, when the world was recovering from the cusps of a global financial crisis. And indeed, a major rally followed where the Dow Jones soared nearly 1020 points and the SP 500 enjoyed a meteoric rise of 5.0 per cent, but there was a caveat to all this- this rally was a sucker's rally, a flash in the pan, a bear trap.
Although plenty of investors and traders might have noted the recent rally on December 26 as a reassertion of the strength of the current decade-long bull market, it was likely a freak incident that gave temporary solace to distressed dabblers in the markets. In fact, the entire rally can be attributed to the increased volatility within the US equity markets at the time; the VIX volatility, Wall Street's fear index that has garnered a longstanding reputation for measuring volatility within the US markets, was hovering in the mid-30s on the day of the rally. Generally a reading of over 20 signals extreme volatility within the markets. In addition, other traditional indexes that complement a general market rally did not perform as expected- many of them had even moved in the opposite direction. One of the primary indicators, the Japanese Yen, a financial haven that is normally treated as an investor's retreat during times of economic turmoil, had strengthened against the dollar, suggesting some investors had safeguarded their capital in the asset. Furthermore, this further suggested that investors were not keen on investing in the U.S equity markets. To add to the list of uncanny occurrences on the day of the rally, the US 10- year yield had fallen; this showed that investors were adding bonds, a safer investment class that does not typically experience much volatility, to their portfolios. Thus, much to the dismay of investors, some indicators in the equity markets suggested that investors were risk-averse and expecting further declines in the US stock market.
The behaviour of the US equity markets, especially in the latter half of 2018, has yet again suggested that that 'global bull' has been slain by the bear, yet plenty of investors choose to disagree with this. Of course, when one examines the growth figures of the US economy, it bewilders one to think that a major bear market or possibly a major recession is to follow. However, to get a notion of the future US equity markets, an investor or trader has to see through these dazzling, glittery numbers and analyze the dirty facts and figures hidden beneath them.
Firstly, from the 20 largest percentage increases in the S&P 500 from the year 1970, sixteen of them had occurred during recessions and major bear markets, suggesting that they were merely a result of volatility within the markets caused by short coverings, investor panic and computerized sellings. Judging the December 26 rally from a statistical point of view, the odds that the rally was a true market reversal are extremely small; investors rushing in to acquire shares during this period are walking a very thin line between slight financial gains and financial ruin. Currently, investors and traders alike should hold their cash reserves steady, avoid making any large investments in any particular company or fund and try to recover some of their losses by selling parts of their losing positions. As for those attempting to 'defy the odds', they are already treading an unfamiliar terrain- risking too much for the possible return of so little.
The new drug in America is not another opioid or a hybrid type of cocaine, but it is the great leveler and supreme destroyer of consumer finance- credit cards, debt, loans and the entire lot of similar names. US consumer debt has seen itself rocketing from its lows back in 2013 to all time highs of over USD 13.3 trillion; still, Americans are oblivious of their spending habits digging their financial graves for them. According to a report from Reuters, US consumer debt shot up USD 454 billion between the second quarter of 2017 and 2018. As for US businesses themselves, they have not been stingy with their spendings either; tax cuts and the ease of acquiring commercial loans combined with decade-low interest rates have compelled American businesses of all shapes and sizes to propose and undertake daring expansion programmes, piling massive amounts of debt in the process. Ultimately, what all these outrageous spending habits are doing is feeding investor fear of rising rates imposed by the US Federal Reserve. Throughout much of 2018, the US equity market had had quite a few corrections caused solely by small hikes in interest rates by the Federal Reserve- all that in spite of bond yields stagnating at decade-long lows. All this tempts one question: what happens when rates rise to levels, say 10 or 15 years back? The answer is simple: company and consumer balance sheets spin out of control, countless companies go bankrupt and the stage is set for the next major debt crisis. If consumers and businesses stay on the track, they are right now, the debt crisis of 2008 will seem like a favourable compromise- a good exchange of pains.
Americans have always been negligent of macroeconomic trends and maintained an aura of selfish nationalism in their politics, but the current US administration's downplay of macroeconomic trends is unsettling. Nevermore has American economic negligence and narcissism been so unreasonable; Americans expect to take home a paycheck and enjoy backyard parties while the rest of the world is living through a period of financial hell. Unfortunately, as supply chains have become globalised and lead to the globalisation of trade, business and investments, the economies of major economies, especially those in the G20 and G7, have become innately linked to each other. Thus, if one link in the chain weakens and breaks, the entire chain collapses. Currently, the world is facing two major trade-related issues- Brexit and the slowdown of the roaring Chinese economy-and the effects of these issues are likely to impact trade throughout much of the West and South-East Asia. In the case of China, Chinese firms and investors have deep financial and business ties with the technology sector of the United States. US tech giants like Apple, Nvidia, Micron and Intel are tied to chip suppliers and producers in China; a slowdown in China's economy that is likely to hit these chip suppliers will resonate further down the supply chain to these US tech giants. Further exacerbating the effects of the Chinese economic slowdown, the current US-China trade war is decreasing consumer demand for products produced from a wide variety of Chinese industries as these products are hit by waves of tariffs. Already showing signs of economic weakness, the December reading for China's manufacturing Purchasing Managing Index (PMI), which tracks economic expansion and contraction, was a meager 49.4, below the consensus estimate of 49.9. A reading below 50 in this index signals economic contraction; the current December reading is the lowest since February 2016.
Moving further West, the mystery of Brexit and its economic implications throughout the Euro-zone as well as the rest of the world is still to be unearthed. Currently, no concrete deal has been achieved for Brexit with the EU and Britain disagreeing on a variety of trade and immigration-related issues. Although Brexit has the potential to cause great harm to world trade, it is impossible to successfully speculate its effects as the EU and Britain are still struggling to devise a conclusive deal. However, if Britain does move out of the free market, there are a couple of different possibilities: a sell-off in the pound and Euro, weakness in the European markets, the re-introduction of protectionist trade policies in Europe and swarm of capital into the greenback. Each of these possibilities deals harm to global trade in some way or another. Protectionist policies create trade barriers that ratchet up the prices of foreign goods, thinning the cash reserves of multinationals. An increase in the greenback hurts demand for American exports as they cost more. And, sell-offs in European markets hurt investor sentiments, which has the possibility of spreading to other markets. All in all, an angel deal for Brexit is a long-shot, if not impossible.
However, the looming global economic slowdown is likely to bear fruits for economies like Bangladesh. With global markets in disarray, some aggressive foreign investors will look for more insulated markets, like that of Bangladesh, to invest; this will create a wave of healthy foreign direct investment that has the potential of developing rising industries and sectors in Bangladesh. In fact, one can say that the Chinese taking a 25 per cent stake in the Dhaka Stock Exchange is already a harbinger of future foreign investments in Bangladesh. If, as a nation, Bangladesh can create a healthy investing atmosphere by decreasing market volatility and offering better insights regarding the prospects of its markets to investors, large foreign investments are likely to enter the nation's economy.
At the start of 2017 and 2018, a recession was somewhat a fantasy- a far cry from the then current status of the market. Yet, due to bitter trade rhetoric, excess buildup of debt and the slowdown of various economies, the developed world has likely set itself up for another economic rollercoaster ride. Yet, there is light in the midst of this gloom. Developing and underdeveloped economies could finally get the capital they require to take their economies up the financial rungs; markets and economies long neglected throughout Africa and Asia will finally receive the much-awaited glance from potential investors. So, even though the prospects of global markets seem grim for the future, there is still a shade of light in the enveloping darkness- gladly, that light is shining on economies like Bangladesh.

pchowdhurry@hamdenhall.org

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