How high can STI go?

Reference is made to the commentary “Is the Recent Rally Irrational Exuberance?” by JEFF SOMMER, Published: September 19, 2009, The New York Times.

US market watchers are now asking the same question that Singapore stock market had asked in July/August. Is the stock market’s recent rally justified by the economic fundamentals? The bulls and the bears are at odds with each others, with both extending their arguments for why the rally should continue or correct.

Since March 9, 2009 when the stock markets around the world hit new lows, there had been significant re-bounds this month, some 6 months later. This upturn is due mainly to stabilising financial crisis and huge fiscal stimulus spending by governments and expansionary monetary policies to jump-start their economies. The economies of these countries are showing signs of economic growth, such as China, Germany, France and Japan. Even the US is expected to slow the decline in Gross Domestic Products (GDP) growth in the second quarter to -1.0% from -6.4% in the first quarter.

Dow Jones Industrial Average

9 October 2007                  14,164

9 March 2009                      6,547

18 September 2009           9,820

 

Dow has increased 50% from March 9 lows but was 30.6% lower than the peak on 9 October 2007.

 

Straits Times Index

9 October 2007                  3,865

9 March 2009                      1,456

18 September 2009           2,647

 

STI has increased 81% from March 9 lows but was 31.5% lower than the peak on 9 October 2007.

 

What these numbers are saying is that the STI rose faster than Dow in the 6 months to September, but both are now about 30% off the peak in October 2007 before the US sub-prime mortgage problems arose.

 

Will STI continue to rally such that it will regain the 30% lost since October 2007? This seems a challenge because 2009 is still in recession and October 2007 was the peak of the economic boom. It will be unthinkable for STI to narrow the 30% gap so quickly without the underpinning economic growth. The question really then is whether the gap of 30% is still too much or 25% gap is more realistic (i.e STI at 2,898). For that matter, is 30% gap already realistic?

 

Written on 9/21/2009 3:36 PM

 

Copyright © 2009, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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