Business

As US politics sour, S'pore market rallies

Arguably the most relevant assessment of the current situation on Wall Street appeared last week in The New York Times and was reprinted in The Business Times last Wednesday: "US partisan conflict is at historically high levels, but the market doesn't care", which outlined two truths about politics and the market.

"The first is that partisan conflict doesn't just seem to have become more intense this year. It has reached new levels of nastiness. The second is that the stock market simply doesn't care. In fact, the rising acrimony has been a fine environment for stocks, though possibly detrimental to the economy itself."

There is a monthly Partisan Conflict Index, which is maintained by the Federal Reserve Bank of Philadelphia, that searches newspaper databases to measure the frequency of articles reporting lawmakers' disagreement about policy.

At the moment, the index is at an all-time high - and so is Wall Street.

Why the latter should be so cannot be explained by conventional logic as political upheaval - as well as the ever-widening probe into Russian involvement in last year's US presidential elections - clearly has the potential to disrupt the status quo and thus cap prices.

Instead, the more the Republicans struggle to deliver on campaign promises in relation to immigration and healthcare, and despite these struggles suggesting that the large-scale fiscal boost that the market had been banking on will take years to materialise, stocks have continued to rise.

One possible reason for this seemingly anomalous behaviour is that the market is still enjoying the after-effects of the Fed's low-interest rate policy that was installed in 2008 to rescue the country's cratering and crooked banks and to save the global financial system.

A second is that throughout most of the past eight years, the main theme has been "bad economic news is good news for stocks" because it meant that the Fed would have to keep rates depressed for longer.

Since that theme has run its course, it has been replaced by "bad political news is good news for stocks", a logical extension since politics and the economy are closely intertwined.

A third explanation is the "buy in anticipation, sell on news" theme, which is always popular with investors.

The logic is that as long as there is anticipation of large-scale government infrastructure spending and tax cuts, there is scope to buy and keep buying. Of course, what follows is that once those plans are formalised, it would be time to sell.

But as noted earlier, this appears years away.

A fourth is that there is still a lot of liquidity sloshing around in the system, money created by the efforts of the Fed and other central banks such as the European Central Bank and the Bank of Japan to stave off a Great Depression, that is looking for decent returns.

Moreover, since these monetary policymakers have repeatedly signalled their readiness to rescue the financial system if and when a crash threatens, then market risk is effectively off the table.

As far as the local market is concerned, it has been the direct beneficiary of a resilient Wall Street and an indirect beneficiary of all of the above, with the added benefit that it endured a poor 2016.

The latter has meant that funds - which like every other investor looks to buy low and sell high - gave it a second look this year, resulting in the outperformance we have seen over the past seven months.

With signs that the local property market may be poised for an upswing, with the global economy picking up slowly and most importantly, with the incumbent US administration unable to push through with its pre-election protectionist stance, there is every chance that local stocks could continue their recovery in the weeks ahead.

Provided that US partisan political conflict also continues.

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