Business

Good economic news is now good for stocks?

IT would be fair to say that Mr Donald Trump is not a universally popular choice as the next US president.

Today, more than a month after he won the election, there is pressure on the 538 electoral voters to not endorse him when they cast what is supposed to be a routine vote to usher him in as the successor to Barack Obama.

Yet, whatever his failings, there is a chance that his impending ascension to the highest office in the land has had one useful outcome - a return to normalcy on the interest rate front, and if this is indeed the case, a return to good news being good for stocks.

For a good part of the past eight years, investing has been based on bad economic news being good for stocks because this meant that central banks would continue their monetary support (or printing, if you prefer).

This was a perverse arrangement as it meant money was invested according to where the money support was the greatest, instead of where it would have the most economic benefits - and quite naturally bred a fair amount of criticism directed at central banks for taking the easy way out when trying to lift their weak domestic economies.

Events over the past month, however, suggest that a shift may be taking place, one that could see good economic news being good for stocks. If this is actually the case, then it is to be welcomed.

This observation is drawn from Wall Street's movements over the past five to six weeks since the US election, where the major indices have risen to all-time highs not because interest rates will be kept low but because they will be raised, perhaps by even more than the market is comfortable with.

This may have been greeted with dismay from some quarters but is actually long overdue.

Readers would no doubt be familiar with the criticisms levelled at the Fed, namely that by interfering with what should be left to the natural forces of supply and demand for so long, the US central bank had encouraged sub-optimal asset allocation, the taking on of disproportionately large amounts of risk as investors searched for yield, and the likely inflation of speculative bubbles in risk assets.

Readers may also recall that at the start of the year, the Fed had signalled a June rate hike but decided to delay it because of Britain's European Union vote.

The position taken in this column was that there would always be external events that had the potential to trigger volatility in capital markets if one looked hard enough, and the sooner moves were made to return normalcy to the rate cycle, the better.

That return appears imminent.

The catalyst has been the election of Mr Trump as the 45th US president because in his election campaign, Mr Trump promised to cut taxes, increase spending on infrastructure and reduce regulations on banks.

Although his impending occupation of the White House has not met with universal acceptance - he lost the popular vote by almost three million votes - and although no one knows what kind of economics the Trump administration will pursue, markets are assuming that the policies will be reflationary.

As far as the local market is concerned, there appears to be sufficient belief in the reflation story to keep the Straits Times Index in the black for 2016 which, considering its 14 per cent loss in 2015, should come as a relief to local investors.

The problem has been - and still is - liquidity, which still hovers around the broking industry's breakeven level of 
$1 billion daily.

And if interest rates do rise as the Fed forecasts they will, this might put a dampener on stocks. In the meantime, let's hope that good economic news is now good for stocks.

This article appears in The Business Times today. For full listings of SGX prices, go to 
http://btd.sg/BTmkts

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