What may happen next

Over the weekend, it was interesting to note that traders in the US considered Wall Street’s performance in May to be far from being a “sell in May and go away” market akin to what I said the local market would be in the same period this year.

US traders claim that despite the poor end-of-the-month closing, May was “still a stellar month.”  Wall Street’s major indices, particularly the Dow Jones Industrial Average and S&P 500, reached record highs in May and were still up in comparison to their previous levels.

Our market even did better. Unlike Wall Street’s major indices, the PSEi was able to recover and climb past the “all-time market breakout barrier of 7,000” when it closed on Friday, the end of May, at 7,012.95.

It maybe interesting to mull on why the market in May was different than it usually was, but I suppose you’d be more interested at the moment to know what may happen next in the market.

Prognosis

As the direction of the local market seems to have been unaffected by looming external economic and market gloom, it remains highly sensitive to developments in the US.

Wall Street last week started to lose footing on news that the stimulus program might be discontinued soon given signs that the US economy was getting better as it was gaining traction.

Contrary to the natural reaction of the market on positive news, it is anticipated that US investors may “wish for a weaker” than an improved employment report for May because this may all the more encourage US authorities to proceed with the plan to discontinue the stimulus program which will generally give way to higher interest rates and taxes.

The stimulus program was put up “to reinvigorate the economy and prevent or reverse a recession” following the Keynesian theory.  This is accomplished through increased government spending.

In this connection, the US congress enacted the $787-billion economic package, called the American Recovery and Reinvestment Act of 2009.  It was “to quickly jump-start economic growth, and save 900,000 to 2.5 million jobs.”

The funds were distributed as follow:  $288 billion in tax cuts; $224 billion in extended unemployment benefits, education and health care and, $275 billion for job creation using federal contracts, grants and loans.

The package was “to be spent over 10 years with 91.5 percent budgeted for the first three fiscal years: $185 billion in 2009; $400 billion in 2010 and $135.0 billion in 2011.”

As of Aug. 29, 2012, some $770.5 billion has been reportedly spent.  This included “$297.8 billion in tax relief; $232.2 billion in entitlements and $240.4 billion in contracts, grants and loans.”

Experts say the success of the stimulus package can be measured by the performance of the stock market particularly the DJIA or Dow, for it has historically performed similar to the economy’s performance.

It seems that it took five years for the stimulus package to take effect and become successful.

On March 11, 2013, the Dow broke its previous all-time record set in 2007 when it closed at 14,254.38.  This was followed by the following developments: “The Dow broke 15,000 for the first time ever on May 2, 2013, but couldn’t sustain it.  On May 7, it closed at 15,056.20.  The Dow’s historical closing high is now 15,409.39, set on May 28, 2013.  This represents some 15-percent increase for the year.”

Bottom line spin

Based on the foregoing observations, it appears that the economic stimulus package had a major impact in shoring the US economy into a  stronger, but not that totally consistent, condition now.

For instance, though manufacturing output has been growing due to stronger consumer spending, the growth has not been consistent. Also, while employment data is improving, it has not been that consistent, as well.

In view of these considerations, the US stock market and its economy are not yet completely “out of the woods,” so to speak.  They could still slow down and reverse trend.

Therefore, while the stimulus program has moved the US economy into a favorable condition now, the gains achieved are still fragile that the continued use and appropriation of the stimulus program, even on a yearly budgetary basis, remain necessary.

As commonly feared, US investors feel that most sectors of the US economy may lose ground and revert into recession.

Thus, Wall Street always losses ground at the slightest insinuation of the termination of the stimulus program.

When this happens, the local stock market is likely to be affected, too.  A classic example was how the market performed last Thursday.  The market suffered its biggest loss for the week despite the report that the gross domestic product (GDP) grew by 7.8 percent.  This was the “highest among Asean economies” for the period, particularly Indonesia’s (6 percent), Thailand (5.3 percent) and Vietnam (4.9 percent). It was even higher than that of China (7.7 percent).

The volatile situation of the market—both here and the US—may linger until the US government comes with a more definite policy on further propping up the US economy.

As a consolation, though, the market in June last year came strong after May.

(The writer is a licensed stockbroker of Eagle Equities, Inc.  You may reach the Market Rider at [email protected] , [email protected] or at www.kapitaltek.com)