As the new year 2019 started, many economics, experts, commentators alike are very concern about economic health of the world. Many have predicted there will be a global growth slow down for the year 2019, but not a recession year. If we were to presume this prediction is correct, what is the consequence of market pricing for investors? Is this year still profitable for stock or market investment?
Precisely speaking, a growth rate slowdown is not a bad or negative prognosis for economic expansion. It means global economy is still healthily growing. It is just that the rate of growth is not as fast as or faster than previous years.
Bases of Market Direction
Let’s narrow down to a particular listed company and analyze its correlation ship between profit and stock performances. Common sense tells us that as long as the listed company is profiting, its stock performance would be reflectively rising. When the company is losing money, its stock pricing will be declining as well. However, in reality, this phenomenon is not happening. Stock direction moves ahead of current condition. It moves according to projection, not actualization.
For example, after President Trump has been elected as US President, US stock markets moved up gradually with the expectation of corporate tax cut implement as promised in his election campaign. After a lengthy period, corporate tax cut effects materialized and eventually reported in handsome corporate earnings, however market indexes did not move up anymore. (see Chart A) Because the markets have long expected these positive corporate earnings reports ahead of time and have long moved up to current position. We normally called it “priced in.”
Market Trends Projection
This is also true when economy goes down, stock market would have moved down before corporate earnings reported losing profit. Stock markets’ pricing reflects trend projection, instead of profiting reality. It moves ahead of actual reality.
This makes investor profiting from stock market difficult. Because it takes accurate prediction ahead of time and invest before reality comes in order to gain profit through stock pricing growth. Conversely true, investors need to pull out his investment before a company starts reporting losing business profit. It is even much more difficult in the way that stock pricing begins to fall not only when the company starts losing profit, but losing the rate of profit growth instead.
Meaning to say that stock prices would not wait to fall after the underlying company reported losing profit. It starts to fall even when earnings report merely reflected lesser profit than previous quarter. Because the drop in profit rate makes investors project a future trend that the underlying company has begun its journey to losing out profit eventually. In short, stock pricing moves according to trend projection, instead of reality.
A perfect example would be CBIP, a listed company on Bursa Malaysia. Its stock price declines since the beginning of 2017 while the underlying company is still earning positive profits, but merely lesser than preceding year (Chart B & Chart C). The company is still profiting and able to function healthily, able to pay salaries, bonuses and dividends. But its stock performance went into bearish trend and became losing streak for its investors.
Market Direction for 2019
This is also true on a broader perspective, when global economy experts say global growth will slow down its growth rate in 2019, stock market indexes will begin its journey travelling to the south where the world is still enjoying positive profit.
Unless those projections of a slowdown global growth rate do not come into reality, market indexes would still move up healthily. In order to avoid bearish market trend, profit growth rate has to keep on expanding faster than before. Anything lesser than this, market indexes would have no mercy.
Looking at what is happening currently, if the US and China trade dispute comes up with a good resolution, Fed has stopped raising interest rate, Trump starts building his Mexico-US border wall forcefully, global economy slow down might not come into realization in 2019. Then stock market might still maintain bullish trend for the US. And the rest of emerging markets might be pulled out of bearish trend eventually.
But market prediction is one of the most difficult jobs in the world. No one can consistently predict with accuracies. There is never fail to have various kind of market predictions at any time. However, only time can verify their respective merits.
Is there still a good profitable year for market investment? You would have to make your own projection. Can you also see a growth rate slow down, or not at all? If you maintain a good and steady growth rate for 2019, instead of a slowdown, this year’s investment would still be a good and profitable year for you. If not, you would also know what to do with your investment capital.
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to conclude individual decision.