Sunday, 25 September 2016

The Exit Might Be Narrower Than Expected

As expected, but disappointingly, US Federal Reserve did not raise interest rates on Wed. The reasons for my pessimism for the current economic conditions are explained in What Have We Got After 8 Years of Easy Money? Unless we see evidence of coordinated fiscal stimulus from governments around the world to increase aggregate demand, more liquidity via easy monetary conditions will only lead to more value destruction as we have seen so far. Given the precarious investing environment, I have been gradually taking money off the table and building up my defences, before everyone else starts to rush for the exit. Based on the experience of the last 12 months, I believe the exit might be narrower than most people expect.

12 months is not a long time. However, over the same period, we have had at least 3 market declines, namely:
  • Aug 2015 - China's renminbi devaluation triggering worries about China's economic slowdown
  • Jan 2016 - China's stock market circuit-breaker meltdown and oil price collapse
  • Apr/May 2016 - "Sell in May and Go Away" syndrome?

In all these 3 episodes, the declines were fast and furious. See the figures below for the extent and duration of the decline. Note that the no. of days in the figures refers to the no. of trading days.

Fig. 1: STI Decline in Aug 2015

Fig. 2: STI Decline in Jan 2016

Fig. 3: STI Decline in Apr/May 2016

In fact, these 3 episodes are not the only times the stock market has declined so rapidly. As far back as Jun 2013, when then Fed chairman raised the possibility of slowing down and scaling back its bond purchases under the Quantitative Easing programme, the markets had also gone into a tailspin, triggering the famous Taper Tantrum. However, neither the extent or the speed of decline matched those that we observed in the last 12 months.

Fig. 4: STI Decline in Jun 2013

A summary of the declines is shown in the table below.

No. of
Avg Daily Decline
22 May 13 - 24 Jun 13 3454.37 3074.31 22 -11.0% -0.50%
24 Jul 15 - 24 Aug 15 3352.65 2843.39 19 -15.2% -0.80%
31 Dec 15 - 21 Jan 16 2882.73 2532.70 14 -12.1% -0.87%
21 Apr 16 - 6 May 16 2960.78 2730.80 10 -7.8% -0.78%

The purpose of this post is not to encourage anyone to sell. Perhaps the market might climb the wall of worry and rise further. However, for those who believe that they can wait until the last moment and run faster than the rest, they might wish to take the above findings into consideration. The exit might be narrower than most people expect.


  1. hi CW, I m more conservative than u... have left the market for awhile leaving only a small stake in it. I don't wanna take chance!

    1. Hi Rolf,

      I don't exit the market totally, because inflation will also erode the value of money. In fact, I realised that inflation can sometimes erode more money that a stock market crash. See Inflation – The Silent Killer for more info. I just keep sufficient reserves to be able to pick up bargains.

    2. well then we need to define bargain?
      how do u know ur bargain is bargain, just because it drop 50% and it is a blue chip with past track records?

      How do we then know the future will repeat the past?

      Just curious because I just heard so many masses, says they are keeping the warchest to unleash when there is a crash or bargain?

    3. I get your point. A bargain is when a stock is trading below its intrinsic price and there are good reasons to believe that it will return to the target price. Most people tend to average down without assessing if it can return to its previous level. I've made such mistakes too. In fact, the largest source of salted fishes in my experience is from past winners. See The Salted Fishes.