I CAN feel it; something just isn’t sitting right with the markets.
For me, it is not a question of whether the stock market will fall, but when it will fall. The other issue is just how bad the collapse will be.
Will it be a correction, where shares fall by no more than 10 per cent? Or will it be an outright crash, when shares could drop by more than 20 per cent?
Before we look at why shares could fall, it could be instructive to look at why stock markets have risen so much in the first place.
Over the last five years, the S&P 500, which is a broad measure of the US market, has increased by more than 70 per cent. The FTSE 100, which is a measure of the UK’s largest 100 companies, has risen 50 per cent.
The Singapore Straits Times Index (SGX: ^STI) has improved by more than 60 per cent. Elsewhere, Japan’s Nikkei 225, South Korea’s Kospi and Taiwan’s Taiex have all touched record highs.
Boom and bust
The general feeling among many experts is that the artificial intelligence boom is behind much of the enthusiasm for shares.
Billions have been poured into the development of AI. It has been characterised as the largest private technology infrastructure build-out in modern history – since the last one during the dotcom era.
Among those ploughing money into AI are the hyperscalers, such as the Magnificent Seven companies that are fuelling the development of computing capacity.
Money is also being spent on data centres, chips and energy grids. By the time they are finished – estimated within the next five years – about US$5 trillion to US$7 trillion would have been spent on AI.
While AI may be behind the surge in American markets, it doesn’t quite explain why the London and Singapore stock markets have been on a tear.
The heavyweight stocks on the FTSE 100 are healthcare, energy, financials, miners and consumer goods. Meanwhile, the main drivers of the STI are banks. Perhaps London and Singapore are just playing “follow the leader”.
No one is worried
Another reason that has been put forward is that markets are now less vulnerable to shocks. After coping with COVID, investors are not easily ruffled by external events, geopolitical or otherwise.
The Ukraine-Russia war caused a minor ripple on global markets. Elsewhere, investors have largely ignored surging oil prices as a result of the US-Iran war.
They should be more worried about inflation. But right now, they are not.
A third reason that has been suggested for rising stock markets is that corporate profits are improving. Most companies seem to be well-positioned to cope with the disruptions brought about by US President Donald Trump’s tariffs.
Some have been able to find new markets for their goods, while others have simply passed on the cost of import duties to American households.
A fourth reason for the resilience of markets has been an adherence to the famous investing maxim that we should buy to the sound of cannons, and sell to the sound of trumpets.
It is a contrarian strategy that suggests geopolitical crises can create buying opportunities for investors who are prepared to take on the risk.
Trump, rather than being a peacemaker, has been fanning the flames of discord around the world. There appears to be no shortage of the sound of gunfire, and victory bugles are unlikely to be heard until he leaves the White House.
Fear of missing out
There is a fifth and perhaps more worrying reason for the rise of global stock markets.
The fear of missing out, or FOMO, has been inflating the equity bubble. Some financial commentators even tell investors that they need to take on more risk because money is cheap and credit is plentiful.
It sounds a lot like the infamous “dance until the music stops” comment made by former Citigroup CEO Charles Prince in 2007. He said that when the music stops, things will be complicated, but as long as the music is playing, we’ve got to get up and dance.
Just months after he uttered those unfortunate words, the subprime mortgage crisis imploded. It triggered the 2008 global financial meltdown.
It is hard to tell which one of the five reasons for the rise and rise of global stock markets will precipitate the downturn in equities. It looks like an accident is just waiting to happen. But a collapse only matters if we buy a stock and hope that it will go up tomorrow.
Warren Buffett said: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
This requires a disciplined approach to buying shares, which, in my case, are income shares that continually reward me regardless of whether the market is up or down.
Buffett also said that he prefers to build arks rather than predict rain. It is dead easy to predict rain, especially here in Singapore.
But a solid portfolio of shares that can generate income in both good times and bad can be as sensible as carrying an umbrella with us at all times. I never go out without my umbrella.
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