Stock market puzzle
THE spectacular rise of the stock market is bringing back memories of 2007, when the market showed dramatic rises as political uncertainty mounted. To what extent is the continuous upward spiral of the market being driven by corporate earnings and dividend payouts, and to what extent is it speculative buying in the context of a declining interest rate environment? Ever since the State Bank started cutting interest rates, the only measure of economic activity that has risen is the stock market, with values and volumes both registering steep increases. Corporate earnings in the listed companies are encouraging, but investment is still nearly zero, and private-sector credit off-take from the banking system is similarly low. Given this context — the refusal on the part of the corporate sector to invest — it is surprising that the earnings alone could be generating such enthusiasm on the trade floor.
It’s noteworthy that the Securities and Exchange Commission has initiated a high-profile probe into the stock market crash of 2008 at precisely this time, when the market is touching record highs all over again. It’s important to understand why the stock market tends to register such sharp increases in times when all other indicators of economic activity show a moribund economy and deteriorating investor confidence. In the present case, for instance, it’s interesting to note that different categories of stocks have played their role in driving up the index at different points in time. Not too long ago, we were told that penny stocks is where the rally is, with large purchases being made by a single bank. Today, the activity has moved to cement and other blue chips. The shifting winds of trader interest belie most economic analyses given by the market players themselves. The hype surrounding these spikes needs to be carefully scrutinised. Let the buyer beware.