Why fundamentals cannot explain the stock market’s performance

The divergent performance of the stock market and economic fundamentals seems to support the argument that the Philippine market is already in the “no interest” phase.

After initially falling by a total of 7.9 percent when the number of new COVID-19 infections exceeded the 3,000 threshold in early March, the benchmark PSEi (Philippine Stock Exchange index) has since managed to stay above the critical 6,400 support level.

This was despite several negative surprises the past few weeks such as the reimposition of Enhanced Community Quarantine and the surge in daily new cases exceeding the 10,000 mark during the Holy Week break.

In fact, the PSEi even increased by almost 1 percent the very next trading day after the government announced that it would reimpose the strictest lockdown measure in NCR (National Capital Region) plus and the parabolic rise in the number of daily new cases.

Another indicator supporting the argument that the Philippine stock market is in the “no interest” phase is the steep decline in trading activity for blue chip stocks.

After interest in high flying issues died down in early March, average daily value turnover in the PSE fell to around P6 billion the past three weeks from an average of around P11 billion in January and February. During the “no interest” phase, prices of stocks do not drop significantly anymore even with bad news because most investors and speculators who want to sell have already sold. Those who are left owning stocks believe that prices are cheap and are prepared to keep their stocks for the long term.

Since share prices no longer want to go down despite bad news, the “no interest” phase is a good time to start accumulating stocks.

The caveat though is that just because stock prices do not want to go down, they will already go up. Unless there are convincing signs that the worst is already over, prices usually stay depressed.

Moreover, even though stocks are cheap, they could drift lower and become cheaper. This phenomenon can last for a long time, making cheap stocks “value traps.” Because of this, investors who do not have patience lose hope and sell at a loss.

Given the risks, be prudent in picking stocks and only invest funds that you do not need in the short term when buying stocks during the “no interest” phase.

Avoid buying companies with a lot of debts. Nobody knows how long this crisis will last and companies with a lot of debts might not have enough resources to survive the crisis.

Moreover, only buy companies that can stay profitable despite weaker sales and make sure that their businesses can continue to grow under the new normal. This is important so that the stocks you buy can go up quickly when the stock market recovers.

Finally, only buy stocks that are trading at cheap valuations. Given the abundance of cheap stocks, there is no point in overpaying. Also, buying cheap means that negatives are priced in, reducing the risk of sharp declines in case more bad news materialize in the future. INQ