November 2, 1996
US Polls Result will have Little Effect on Dow, says Expert
by Fred Tam
Of late there is much talk in the investment circle on the after-effect of the coming US presidential elections on the US stock market and by logical extension, the world stock markets, including Malaysia.
Many market forecasters are warning of a sharp correction if not a mini-crash by 50% or more immediately after the US presidential elections. Much as this call by the doomsday forecasters are nothing new (as they have called for a “crash” on the Dow ever since it rose above 3,600 points), investors and fund managers are nevertheless taking a cautious stand “just in case” by chance they’re proven correct.
On the other side of the fence are also analysts and investors who believe otherwise. But of the so many proponents of a higher Dow that I chanced to read, one man came across loud and clear about his stand on the effects of the US presidential elections on the Dow and by extension our local market. I would like to share his views with you in this issue.
His name is Mr. Martin A. Armstrong, founder and chairman of Princeton Economic International Ltd. Some of you may have already heard of him from his commentaries on the Bloomberg Internet. But for others, like myself. it was a first meeting with this innovative thinking “techno-economist” at the 9th Annual Conference of the International Federation of Technical Analysts (Ifta) held in Amsterdam last weekend.
What is interesting about Mr. Armstrong is his methodologies of the financial market and his eloquence and logic in applying his unique brand of “techno-economic” analysis which “combines technical, cyclical, quantitative and international forms” to the stock markets.
Armstrong was very certain when asked to comment on the effects of next week’s US presidential elections on the Dow.
“The outcome will have little effect. The Dow will continue to rise because it is particularly linked with the fate of the US dollar at this time. Sharp movements in the dollar will be accompanied by sharp movements in the Dow. As the dollar strengthens, this will keep the foreign buying coming into the US market thus providing good underlying support,” says Armstrong.
How many analysts see a link between a country’s currency and its stock market? Those who do will share one of the methodologies of Armstrong because he believes that since the world trend is now shifting towards “floating exchange rates” system, he feels there is a strong co-relationship between a country’s currency and its stock market. He therefore advises not to ignore the currency markets.
To him, international capital flows (into or out of a stock market) stems from investments which will in turn be attracted by a strong currency.
Fore the immediate term, Armstrong sees a strong US dollar and an accompanying major high, near the 10,000 level, for the Dow by June 1998.
On the question of whether the Dow is not already overpriced by now, he uses some “adjusted for inflation” Dow Jones charts by way of illustration.
“Clearly, the nominal value of the Dow may appear to be way overvalued, but in reality, the Dow is still catching up with the rest of its economy. By this we mean that since 1980, the Dow has risen from 1,000 to 6,000.
“The national debt has also risen from US$1 trillion (US$=RM2.53) to nearly US$5.2 trillion. It is impossible to see the Dow crash by 50% or more as many doomsday forecasters portray. What they are not taking into consideration when comparing current chart patterns with those of the past is the fact that the past represented a stable and single world currency—namely gold. Today, the nominal value of the Dow is actually not way overvalued given the vast increase in the money supply as a whole.”
And finally, he says there’s a myth that there is a direct relationship between interest rates and stock market performance.
If player’s confidence is high (for e.g. they expect the stock market to double) they will gladly pay high interest, even, say 50%. It is therefore not true to say a rise in interest rates will necessarily result in a fall in stock prices.
Lastly, on when a stock market will peak or top-out, here’s his answer. The stock market will peak when the perceived NET DIFFERENCE between market expectations and the level of current interest rates converge. As long as there is a wider differential between the level of interest rates and the rate of advance in the stock market, a simple rise in the underlying interest rate will NOT result in a decline within the stock market.
KLCI’s current positive trend is proof that fund managers have a positive view about the direction of the Dow. If at all there were market fears of a “crash” in the Dow, this fear would have been reflected in our own KLCI but it is not there.
If the strength of a nation’s currency contributes to the health of its stock market as Armstrong professes, then the ringgit’s performance is something that we can be proud of. At RM2.50 to US$1, we cannot complain. And if it can strengthen further, so should our stock market.
And readers should not worry too much about our Bank Negara’s rumored interest rate rise. Even if it is so, we now know that a rate increase need not result in a decline in stocks provided there is a wide differential between the level of interest rates and the rate of advance in our stock market. Can this be said of our second board?