Will investors turn chicken in Year of the Rooster?
Global stock markets have turned in mixed performances so far in 2005. Bullish investors hoping that early 2005 returns would form the basis for further gains in stocks for the rest of the year may be disappointed. And with bond yields low but short-term interest rates rising, investors may be forgiven for thinking that the investment outlook is poor for the Year of the Rooster. However, expert opinions remain highly divided.
The Chinese Year of the Rooster begins on 9 February. So far, European stock investors have the best reasons to crow.
Where are stock markets likely to go from here?
Rising interest rates suggest that markets will go down. The Federal Reserve has been on a tightening cycle since the middle of last year and, just last week, raised the federal funds rate again to 2.5 percent.
And yet, interest rates remain low and the yield curve steep compared to historical norms. In the past, these have often provided good conditions for higher stock valuations.
As for the economy, most economists expect moderation in the coming months. A global all-industry index produced by JP Morgan edged lower to 57.1 in January from 57.2 the previous month. Its global manufacturing PMI was also slightly down based on its latest revised series, from 53.3 in December to 53.0 in January.
"The latest output indexes are consistent with annualized growth of approximately 3.5 percent in global GDP and 2 percent in global industrial production," said David Hensley, director of global economics at JP Morgan, in New York recently.
Such rates of growth should not preclude gains for stocks. But they don't guarantee it either. Columnists at CBS MarketWatch have of late argued for both.
Herb Greenberg, a senior columnist at CBS MarketWatch, wrote in a commentary on 4 February entitled "Investors ignore risk, reach for return" that investors might be too complacent.
"If markets climb a wall of worry, as the old adage goes, they collapse on a crevice of complacency," he wrote. "From my perch, the complacency in a wide variety of names, many of which show up in this column, hasn't been this pronounced since 1999 to 2000. There's simply little in the way of respect for risk, which is why I call this the no-fear phase of this market's cycle."
However, Mark Hulbert, editor of Hulbert Financial Digest and fellow columnist at CBS MarketWatch, thinks otherwise.
In a commentary entitled "The retreat of the bulls" on 2 February, he points out that the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average stock market exposure among some short-term market-timing newsletters, has dropped from 59.2 percent in late December to 23.5 percent. Other indicators like the Hulbert Nasdaq Newsletter Sentiment Index and the American Association of Individual Investors' member survey also indicate large shifts in sentiment from bullishness towards bearishness.
Interestingly enough, Mark Hulbert appears to be saying the same thing about bonds, the usual alternative to stocks. He wrote in a 1 February commentary that "Bond advisers are too bearish right now". According to him, the Hulbert Bond Newsletter Sentiment Index (HBNSI), which represents the average bond market exposure among some short-term bond-timing newsletters, as of the end of January stood at negative 3.2 percent, which means that the average adviser among this group of bond timers is actually short the bond market.
However, CBS MarketWatch columnist Peter Brimelow and Edwin S Rubenstein, president of ESR Research, are not so sure. The latter two wrote a commentary on 3 February entitled "Bonds in uncharted territory" which said that if bonds do rally, it is likely to be for the short term only.
"The great bond bull market since 1980 is living on borrowed time," they wrote. "Our chart today shows that the post-1980 bond bull market is now already in territory uncharted in the past 100 years... There's room for a lot of play around these very long-term trends. But the end for bonds is nigh -- or the financial world is turning upside down."
However, the authors seem to be ignoring even longer-term trends. Indeed, the article provided data showing that $1 invested in bonds in 1801 would have grown to $122 in 1920 after adjusting for inflation. That's a real rate of return of about 4 percent a year. Since then, the value of the investment would have grown to $1089 in 2004 for a real rate of return of less than 3 percent a year.
No, the data actually show that bonds have some catching up to do. But that doesn't mean that it has to catch up anytime soon.
Contrary to what Brimelow and Rubenstein wrote, bonds might instead fall in the short term but rise thereafter. That is because while Hulbert may be correct in saying that bond traders in the US are short the bond market, the big players of today, the Asian central banks, are long -- very long see my previous
article "Explaining the fall in bond yields").
With the outlook so uncertain, I guess you can't blame investors who turn chicken on stocks or bonds going into the Year of the Rooster. Remember, the rooster may have wings but it cannot fly. Perceived potential for stocks and bonds gains may prove just as deceiving.
The Chinese Year of the Rooster begins on 9 February. So far, European stock investors have the best reasons to crow.
| Close on 31 Dec 2004 | Close on 4 Feb 2005 | Percent change | |
| S&P 500 | 1,213.55 | 1,203.03 | -0.9 |
| Nikkei 225 | 11,488.76 | 11,360.40 | -1.1 |
| Hang Seng | 14,230.14 | 13,585.17 | -4.5 |
| Straits Times | 2,066.14 | 2,113.58 | 2.3 |
| FTSE 100 | 4,814.3 | 4,941.5 | 2.6 |
| DAX | 4,256.08 | 4,339.28 | 2.0 |
| CAC 40 | 3,821.16 | 3,958.01 | 3.6 |
Where are stock markets likely to go from here?
Rising interest rates suggest that markets will go down. The Federal Reserve has been on a tightening cycle since the middle of last year and, just last week, raised the federal funds rate again to 2.5 percent.
And yet, interest rates remain low and the yield curve steep compared to historical norms. In the past, these have often provided good conditions for higher stock valuations.
As for the economy, most economists expect moderation in the coming months. A global all-industry index produced by JP Morgan edged lower to 57.1 in January from 57.2 the previous month. Its global manufacturing PMI was also slightly down based on its latest revised series, from 53.3 in December to 53.0 in January.
"The latest output indexes are consistent with annualized growth of approximately 3.5 percent in global GDP and 2 percent in global industrial production," said David Hensley, director of global economics at JP Morgan, in New York recently.
Such rates of growth should not preclude gains for stocks. But they don't guarantee it either. Columnists at CBS MarketWatch have of late argued for both.
Herb Greenberg, a senior columnist at CBS MarketWatch, wrote in a commentary on 4 February entitled "Investors ignore risk, reach for return" that investors might be too complacent.
"If markets climb a wall of worry, as the old adage goes, they collapse on a crevice of complacency," he wrote. "From my perch, the complacency in a wide variety of names, many of which show up in this column, hasn't been this pronounced since 1999 to 2000. There's simply little in the way of respect for risk, which is why I call this the no-fear phase of this market's cycle."
However, Mark Hulbert, editor of Hulbert Financial Digest and fellow columnist at CBS MarketWatch, thinks otherwise.
In a commentary entitled "The retreat of the bulls" on 2 February, he points out that the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average stock market exposure among some short-term market-timing newsletters, has dropped from 59.2 percent in late December to 23.5 percent. Other indicators like the Hulbert Nasdaq Newsletter Sentiment Index and the American Association of Individual Investors' member survey also indicate large shifts in sentiment from bullishness towards bearishness.
Interestingly enough, Mark Hulbert appears to be saying the same thing about bonds, the usual alternative to stocks. He wrote in a 1 February commentary that "Bond advisers are too bearish right now". According to him, the Hulbert Bond Newsletter Sentiment Index (HBNSI), which represents the average bond market exposure among some short-term bond-timing newsletters, as of the end of January stood at negative 3.2 percent, which means that the average adviser among this group of bond timers is actually short the bond market.
However, CBS MarketWatch columnist Peter Brimelow and Edwin S Rubenstein, president of ESR Research, are not so sure. The latter two wrote a commentary on 3 February entitled "Bonds in uncharted territory" which said that if bonds do rally, it is likely to be for the short term only.
"The great bond bull market since 1980 is living on borrowed time," they wrote. "Our chart today shows that the post-1980 bond bull market is now already in territory uncharted in the past 100 years... There's room for a lot of play around these very long-term trends. But the end for bonds is nigh -- or the financial world is turning upside down."
However, the authors seem to be ignoring even longer-term trends. Indeed, the article provided data showing that $1 invested in bonds in 1801 would have grown to $122 in 1920 after adjusting for inflation. That's a real rate of return of about 4 percent a year. Since then, the value of the investment would have grown to $1089 in 2004 for a real rate of return of less than 3 percent a year.
No, the data actually show that bonds have some catching up to do. But that doesn't mean that it has to catch up anytime soon.
Contrary to what Brimelow and Rubenstein wrote, bonds might instead fall in the short term but rise thereafter. That is because while Hulbert may be correct in saying that bond traders in the US are short the bond market, the big players of today, the Asian central banks, are long -- very long see my previous
article "Explaining the fall in bond yields").
With the outlook so uncertain, I guess you can't blame investors who turn chicken on stocks or bonds going into the Year of the Rooster. Remember, the rooster may have wings but it cannot fly. Perceived potential for stocks and bonds gains may prove just as deceiving.
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