Bear market in a bullish economy
A “bear market” in financial parlance is a stock market that has declined to at least 20 percent below its highest closing level and remains depressed for a period of time. The Philippine stock market reached that dubious status on Thursday and confirmed it on Friday as indicated by the Philippine Stock Exchange index (PSEi). The market fall added the label, the “worst performing market in Asia” to the list of the country’s perceived economic woes, which already included “Asia’s worst performing currency,” “persistently high inflation,” and “growing current account deficit.”
The index closed at 7,098.15 points on Thursday, down 21.6 percent from its all-time high of 9,058.62 on January 29. To confirm that Thursday’s closing figure truly heralded the start of a bear market period and was not just a disappointing one-day dip, the market retreated a further 0.49 percent to close at 7,063.20 on Friday. The prevailing view among analysts, particularly those watching from afar, is that the “bear market” period is likely to continue for some time.
A large part of the reason it might is that those very reports that select the declining stock market as one of the bits of evidence to imply there is a state of economic instability here tend to dampen investor sentiment. Markets are extremely sensitive to bad news, so framing reports in a circular way, i.e., “the Philippine market will perform poorly because there is economic uncertainty, one sign of which is the poor performance of the market,” in effect creates a self-fulfilling prophecy.
To be sure, a bear market cannot in any sense be described as good news. The relevance of the bad news of a weaker stock market, however, does not extend beyond the market itself, except in extreme conditions like a legitimate market crash where the drop in stock prices is so rapid that the listing companies’ financial viability is threatened.
That is certainly not the case now; in spite of the decline of the PSEi, listed companies continue to report reasonably healthy profits and expanding business activities. This, coupled with the country’s sustained period of economic growth – a rate that is one of the best in Asia, in stark contrast to the other factors in which the Philippines is the worst – rather confirms the often expressed view of analysts that Philippine stocks are simply overpriced; for instance, banking giant HSBC made that very observation as recently as the beginning of this month.
The broader significance of the stock market’s decline is further diluted when factors that are left out of “the sky is falling” narrative are taken into consideration. Manufacturing output has increased in defiance of higher inflation and a weaker peso, and so have remittances from overseas workers. While the country’s widening trade gap can be accurately explained by the weaker currency (which makes imports more expensive), the mere fact that it is growing indicates that the volume of imports has not declined, which in turn, indicates that spending remains robust.
Reports about the Philippines’ bear market do matter, if one happens to be a stock market investor. It is bad news for short-term investors looking to make a quick profit, but is a potential opportunity for long-term investors more inclined to buy and hold stocks. Beyond that, however, there is little significant meaning for the broader economy in the stock market’s current state, and it is certainly not a factor that the Philippines’ economic managers need to “do something” to correct.
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