The strong performance of the stock market this month has caught a great number of investors by surprise, who were expecting that last year’s losses were the beginning of a long awaited bear market.
Last December, I mentioned in my column entitled “Should we expect a Santa Claus rally this Christmas?” that for the last 30 years, the Philippine stock market has always rallied during the last five days of the year with an average gain of 2.23 percent.
What makes this more interesting is that the rally usually extends to the first two days of January in about 90 percent of the time, increasing total historical gains to 3.3 percent.
Following the law of averages, the stock market did recover last Christmas with a total gain of 3.8 percent in the last five days of December from 6,587 to close the year at 6,840. As expected, the market also extended the rally in the first two days of 2017 for a total gain of 6.7 percent.
Will the stock market sustain its rally this month?
If we are going to follow historical tendencies, the current uptrend will most likely extend until the end of the month. For the past 30 years since 1985, the stock has always performed positively well in about 90 percent of the time with an average gain of 3.5 percent.
Measuring the strength of the rally that started last Christmas to first two days of January, the actual gain of 6.7 percent was more than double the historical gain of 3.3 percent. Using the same magnitude, the target gain by end of the month must be at least 7.1 percent, which translates to 7,054.
The fact that the market has achieved and surpassed this level recently indicates that current trend enjoys a strong upward momentum. A temporary correction should hold the market above the 7,000 level while breakout from the current consolidation may bring the PSE index toward 7,500 level in the next few weeks.
Last year, I mentioned in my column “How do Presidential elections affect the stock market?” that the stock market had historically performed the strongest the year after a new President was proclaimed.
This was evident during the past four presidential elections. The stock market ended with the highest return of 116 percent from the time President Ramos assumed office in July 1992 up to December 1993. The market gained 36 percent during the time of President Aquino and 32 percent during the term of President Arroyo.
During the time of President Estrada, the market gained only 15 percent because at that time in 1999, the global markets were reeling from the Asian financial crisis. Still, the market ended on a positive note despite a challenging environment.
If this historical pattern holds, there is a good chance the stock market will also end higher this year. The PSE index was at 7,564 when President Duterte was proclaimed last year. Assuming the market will gain by 15 percent, similar to the gain at the time of President Estrada, will the stock market end the year with a record high of 8,698?
The Philippine economy is seen to remain robust this year with an expected GDP growth rate of 7 percent, making the country one of the best performers in Asia. Prospect of rising interest and inflation rates as result of strong consumer spending, are signs of a healthy economy.
This promising economic out look should translate to higher corporate earnings growth rate. Higher earnings prospect means lower valuation at current share prices, which could mean higher demand for stocks.
With a positive fundamental backdrop coupled with a favorable historical perspective, there is good reason to expect that a bull market may just be in the offing. If you missed to buy last month while stocks were at bargain prices, now is your time to accumulate when the market corrects.