Short-term positive, long-term uncertain

At any one time, markets can be found to operate in one of many states, ranging from "short-term positive, long-term positive" to "short-term negative, long-term negative" with every possible variation in between.

As it stands now, one might say that Wall Street's rise to many all-time highs this year suggests investors are long-term positive, even if valuation metrics suggest there is a chance of a large correction, in which case the short-term outlook could be negative.

Much, of course, depends on the consensus view.

It is sometimes said that investors are fundamentally bearish at heart, an observation that has plenty of truth when one considers that nobody ever makes money when they buy something, only when they sell it, or that markets rely wholly on the "greater fool" theory for proper functioning.

If so, then those holding large positions in equities must be watching Wall Street with plenty of mixed emotions.

There would surely be worry at last week's large swings that few analysts were able to properly explain, and hope that the party can continue a while longer to entice more greater fools into the market, all mixed with fear that it might all go belly-up when the consensus is that the Trump administration won't be able to deliver on its campaign promises.

Those promises formed what became known as the Trump reflation play, a theme which took hold soon after last year's US elections when the market placed heavy bets on large tax cuts and increased infrastructure spending, giving a two-pronged boost to the US economy.

Today, given the administration's inability to push through any meaningful reform or legislation, you'd be hard-pressed to find analysts who seriously believe that this theme is still valid and, in fact, no one mentions this as a reason to stay invested in equities.

Moreover, as Mr Trump's political worries mount with allegations of Russian meddling, few see it as having any purchase any more.

Yet despite these headwinds, US stocks have stayed firm, driven by financials, technology and cyclicals over the past year. Their all-time highs have come despite conventional valuation metrics suggesting overvaluation. So is a blowout imminent?

DBS chief investment officer Lim Say Boon probably laid it out best when he said last week that developed market equities - particularly US stocks - range from fairly valued to overvalued.

"And indeed, the risk of a correction, which we had expected last quarter, remains high," noted Mr Lim.

"Yet, the global economy continues to grow with reasonable strength, interest rates remain historically very low, and political risks appear containable. All of which means a bear market is also unlikely - neither feast nor famine."

Of course, whether current growth is robust enough to justify stocks at all-time highs is debatable - by most estimates, 2017 US gross domestic product growth is likely to be 2 per cent.

Furthermore, as the Organisation for Economic Co-operation and Development noted in its June report on the US, downside risks remain sizeable, perhaps the largest being that the "size and timing of fiscal stimulus are uncertain", a clear reference to the uncertainty clouding the administration's budget.

Perhaps the best that can be said is that stocks will remain supported by benign monetary policy, though as fresh all-time highs are scaled, nervousness and volatility will increase.

As for the local market, the divergence between the index and the broad market is plain to see. Thanks mainly to banks, the Straits Times Index is near a two-year high, yet it is unlikely that a significant portion of the broad market has followed suit.

So the conclusion has to be that although the near-term outlook for the index is positive, the longer-term outlook for the rest of the market is largely uncertain.

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