A quick look at the US and Jamaican economies and stock markets

THE COVID -19 crisis has been unlike any other crisis we have seen in that it represented a forced stop to economic activity, particularly moving about. Its severe economic impact was largely offset by completely unprecedented fiscal and monetary stimulus, at least for some major developed countries, although this varied by country. Not so much for emerging markets, particularly in our tourism-dependent region.

It has also proved once again, if there was ever any doubt, that Jamaica is attached at the hip to the United States, whose citizens have kept our local tourism industry alive. Perhaps more importantly, the huge US stimulus-driven surge in remittances has represented Jamaica’s real social safety net.

Last year’s decline in Jamaica’s GDP of roughly 10% compares with a GDP decline of only around 3% in the US which will run unprecedented fiscal deficits both last year and this year in response to the COVID war.

In the short run, liquidity drives markets.

“The stock market is a voting machine and not a counting machine,” as Warren Buffett has said, quoting another of his heroes.

Within a few weeks of the crisis, the US responded with an unprecedented fiscal and monetary response that has driven a sharp stock market and corporate credit recovery (aborting what looked initially like a new greater recession). Their market recovery has been so strong that Morgan Stanley’s Head of Emerging Markets and Chief Global Strategist Ruchir Sharma this week wrote a piece, Whither the Bubblets of 2021, which looked at the 10 biggest (and most well known) bubbles of the last century, eg the 1929 US stock market crash, and also did a 50-year historical analysis back to 1970 of stock and commodity markets from Germany to Thailand where data are less extensive. Incidentally, a quick definition of a bubble is prices rising much more quickly than earnings can justify, combined with symptoms of mania — meaning frenzied trading and borrowing.

Typically, he advises, prices rise by 100% in the year before the bubble peaks, with much of the gain packed into the climatic last few months. He cautions however, that one needs to make sure one isn’t “capturing assets that are merely bouncing off extreme lows”.

Applying his criteria, Morgan Stanley identified at least five potential current “bubblets”. He includes “the crypto market for Bitcoin and Ethereum; clean energy stocks, including some of the biggest names in electric vehicles; small cap stocks, including many of the hottest pandemic stories; a basket of tech stocks that lack earnings, which is also chockablock with famous brands; and special purpose acquisition companies (SPACS) which allow investors a new way to buy into private firms before they go public”.

They captured each of these in an index that doubled (or more) to a peak value of between US$500 billion and US$2.5 trillion over last year, as “day traders, celebrities and other newbies rushed in — a common symptom of late-stage market manias”, according to Sharma.

While frequently experiencing mid-course corrections of 25 to 35 %, (averaging 30%), the key to watch for was the one-way downhill phase, which for the 39 bubblets (and roughly the ten major crashes) average around 71% down after roughly 2 years (22 months). Sharma notes that except for the index of small cap tech stocks, all the other bubblet candidates have experienced a fall of a minimum of 35% (highest 55% for ethereum), implying they may be in the downhill phase still, and far from the typical bottom of 70% down.

Let us apply the lessons of Sharma’s study to the Jamaican stock market, looking at instances where the local market has at least doubled over the last 30 years. In 1992 the Jamaican stock market went up 400%. This was clearly a bubble, which was definitely pricked by a doubling of interest rates post-election in April 1993, although it would likely have corrected anyway. I remember well the climatic rise and peak in the month of January 1993 before the stock markets long fall, a story for another day. In 2004 the Jamaican Stock Market again doubled, as I had actually projected at the beginning of the year at a Gracekennedy investment forum (I worked at their stockbrokerage at the time). Towards the end of that period, as is the norm internationally, a number of local strategists predicted the market would rise another 50% next year. This was always extremely unlikely as the average stock now had a price earnings ratio in the 20s at the time. Another key sign that these projections would be wrong was that the sharp improvement in the local macroeconomic situation (a function of the then partnership for progress initiative and other factors) began to stall by late August that year, and the next few years were ones of high economic and political uncertainty.