Is the bear market over?
Last week we had a webinar to discuss “Is the bear market over?”
Aside from the strong performance of the stock market, there are compelling fundamental reasons to believe that it is. These include more and more signs that inflation in the United States is slowing down, expectations that the Fed fund rate will peak soon, falling bond yields in the secondary market, a weaker US dollar, and the stronger than expected Philippine economic performance and corporate earnings growth during the first nine months of the year.
However, my conviction that the bear market is over is not very strong due to the numerous threats that still exist.
For one, I think there is a strong possibility that the United States will enter a recession next year. Note that the Fed continues to raise rates aggressively and implement quantitative tightening despite increasing signs of economic weakness. Tighter monetary conditions are not favorable for economic growth and the stock market.
Although many economists expect the Fed to start cutting rates soon, rate cuts work with a lag. Consequently, in the past, it took the stock market several months after the first rate cut to hit bottom.
Moreover, I don’t expect the US government to implement new stimulus programs next year to boost the economy given its much higher debt level following the pandemic. Any plans to do so will be viewed negatively, leading to disastrous consequences. Recall how the British pound and UK gilts fell sharply last September after then UK Prime Minister Liz Truss announced an economic package authorizing 45 billion pounds in unfunded tax cuts.
Government’s inability to meaningfully stimulate the economy is also true for the Philippines given our elevated debt to gross domestic product (GDP)ratio of 63.7 percent as of end September this year from less than 40 percent prior to the pandemic.
Although US stocks have gone down a lot, valuations are also not yet attractive. At 3,900, the S&P 500 is still trading at a P/E ratio of 17X for 2023, merely at par with its historical average.
And while Philippine stocks are trading at much cheaper valuations, it will be difficult for local stocks to go up sustainably if US stocks continue to trend lower.
Given the numerous threats facing the local equity market, I think it would be wise for investors to sell some stocks in their portfolio after the market’s strong rally since the start of October. During our webinar last week, COL chair Edward Lee advised investors to sell around 30 percent of their stock portfolios to generate some cash. This is dry powder that can be deployed in case share prices go down again in the future, helping generate excess returns.
That said, I would like to stress that I continue to have a positive long-term view on the Philippine economy and the stock market. This is why I believe investors should still keep bulk of their stock portfolios intact so that in case prices continue to go up, they will still benefit. INQ
