Friday, 6 January 2017

Investor sentiments - Recent unrealistic expectations of the market?

Before Brexit and before the US elections, markets were in the red daily, billions were wiped off the share markets. Conversely and similarly, post-Brexit and Post-elections, the markets rebounded. However, the million dollar question is; are the rebounds sustainable?

Ever since news broke out that Mr. Donald Trump was elected to be the next president of the U.S., markets have been on the rise, with the STI soaring nearly 200 points. Just take a look at the chart below:

(image credits: Yahoo Finance)

This may be due to reasons including that Mr Trump could perhaps spur the U.S. economy towards further growth, but what investors are forgetting is that he has not even taken office. What's also funny is that before the elections concluded, investors and analysts were actually worried that markets may plunge if he were to be elected as they believed that Mrs. Clinton provided greater certainty for the market than Mr. Trump.

Another commonly cited reason for the recent bullish run on the stock market is that the U.S. economy has been doing well, evidenced by the recent rise in interest rates by the Fed, and the hinted further raises in 2017. However, we have been in a low interest rate environment ever since the global financial crisis in 2008-2009, and in my opinion, the impact of raising interest rates on the economy and business remains unclear.

The problem is that the markets are illogical in the short run, and investors' sentiments plays a huge role in influencing the direction of the market, evidenced by the recent reactions to the U.S. elections.

Just think of it this way; if you're interested to buy a plate of chicken rice, and assuming that you have the time, would you buy it from a store with a long queue or one with no queue at all? People would generally choose the one with the long queue! Not because it is definitely going to be fantastic, but because of the hype! Because others are doing it as well, because of safety in numbers!

Eventually, prices of shares may possibly arrive at unreasonable levels and thats when I (and probably other investors) may take the opportunity to sell some holdings. Because ultimately, after long and unrealistic bullish runs, market corrections tend to occur, and that's when having a little spare cash would bring you a long long way. 

Wishing everyone the best of luck steering through these rough waters.

Best Regards,
A 😁

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