Decoding The Stock Market

The financial markets are always full of uncertainties. It is generally believed that no one in the world can consistently beat the market as the financial markets are made up of market participants that "move" in groups. The markets only shift the momentum from one direction to the other when the group decides. Not when the individual trader believes the reversal should occur. 

It is believed that for any big movement in price, there must be a fundamental news associated with it, however, the extent of the price swing really depends on how the group think at that moment of the event. In this article, some historical events are highlighted, and we shall look at how the market reacted to each event. 

Date/ Events	Markets	Duration (Beginning of the crisis date to the lowest point)	Change in Index（%）
2001  Sept 11 The US Twin Towers Terrorist Attack	S&P 500 KLCI STI	2 weeks 9 weeks 2 weeks	-9% -14% -21%
2003  Feb 24 Asia SARS	STI KLCI	3 weeks 3 weeks	-8% -6%
2004  Dec 26 Indonesia Tsunami	JCI KLCI STI	No effect No effect No effect	- - -
2005 Aug 28 US Katrina Hurricane	S&P 500 KLCI STI	No effect No effect No effect	- - -
2011 Mar 11 Japan Earthquake/Tsunami	S&P 500 KLCI STI	4 trading days 1 trading day 5 trading days	-2.3% -0.7% -4.3%
2011 Aug 1 US Debt Ceiling (1)	S&P 500 KLCI STI	8 weeks 8 weeks 8 weeks	-18% -15% -21%
2013 Jan 1 US Debt Ceiling (2)	S&P 500 KLCI STI	No effect 5 weeks 2 weeks	- -5.8% -2.4%

Markets are move by news, whether it is micro or macro news. Some news are unheard of such as "Black Swan" incidents, others like asset bubbles kept repeating in the markets. Examples of the historical asset bubbles are: the Japanese asset bubble in the early 1990's; the dot com bubble in the US in 2000; and the 2008 US subprime martgage crisis. These asset bubbles generally impact the financial markets more severely than those ad hoc Black Swan events. For examples: the Nikkei 225 hit 39,000 points before the crash, and until today the index can not be restored. While the US dot com bubble took the Nasdaq 15 years to recover to its 5000 level mark.

In the above table, it is shown that natural disasters and some ad hoc events have short term impact on the financial markets in US, Malaysia and Singapore as compared to historical asset bubbles (which is not included in the table). In addition, the incidents related to the US impacted the Malaysia and Singapore markets more than other Asian countires' event. We saw the local market reacted more on the US debt ceiling and the terrorist attack incidents. 

Another finding from the above table is that: the market will analyse the relavance of the event to our own country. For example, the United States is Malaysia important trading partner, hence, major incidents from the US will impact the local stock market negatively. The extent of the negative sentiments could last for 2 to 9 weeks and the index fell not more than 15% for the KLCI. 

How about our own local disastrous news? How would that affect our stock market?

In March 2014, MAS encountered a fatal commercial air accident that climed hundreds of casualties. At the event, the MAS shares plummeted. Several months later, in July, another MAS aircraft crashed which claimed more lives, but the MAS shares did not experience the same kind of decline. This shows that when things happened twice, it will not cause much havoc in stock market as people already had the experience, just as the US debt ceiling crisis.

How about oil prices? Yes, Malaysia is affected by the plunging of crude oil prices as we are a net exporter of crude oil. When the crude oil price crashed in September 2014, followed by ringgit depreciation, this is no more an ad hoc incident, but more of a fundamental impact to our economy. However, whether our economy can ride through these hurdles depends on 3 things: the interest rates, the housing prices and the liquidity in the financial systems. Since we know that market moves in groups, and investors confidence will greatly affect the sentiments of the market. In order to restore the market  confidence, we must first take care of the "feelings" of investors/ market participants. In general, I believe investors want to see low interest rates, stable housing prices, and healthy liquidity in our financial system.