THE stock market is within a whisker of charting into positive territory for the year, recouping much of the sharp losses as the massive fiscal stimulus and hopes of an earnest recovery build momentum surrounding the earnings of companies and the rate of growth of the economy.
The FBM KLCI rode on the concept play of glove makers and rotational play among lower liners during the depths of the crisis, but it’s the bounce of the heavyweight stocks that was the fifth gear the index benefited from.
The absence of short selling has meant the one-way ride has been unchecked.
The inability to short-sell has mean the discovery of valuation would be harder to achieve as high market valuations would make the local stock market overpriced in comparison with regional peers.
But with volume and the churning of stocks remaining high, the Covid-19 crisis has been somewhat inexplicably beneficial to the broader stock market.
But can this irrational exuberance last?
Seeing the target price of the glove companies gets higher as those stocks climb has been discomforting.
Yes, there is going to be a big jump in their earnings but for how long?
As the rate of infections starts to fall so will demand for the medical equipment. The world rushed to build ventilators and now there is an oversupply based on what’s available and needed.
Let’s hope it remains that way.
The fad of getting into personal protective equipment like masks will soon fade as prices start to fall and supply starts to flood the market.
But the proof of the rally will be its sustainability.
The next wave isn’t hopefully a spike in new infections but the realisation that fundamentals will have to catch up with reality.
How are the earnings of banks, basic industries companies and plantation companies that count in the index going to perform?
The new normal has seen demand recovery in its embryonic state.
The price of crude oil is an indicator and so is the pruchase of other consumables and bank lending.
Incentives to buy new cars and houses are needed to get the economy going again but there needs to be active buying of big ticket items and other consumables in a sustainable way to get corporate earnings back up again.
Only then will the high valuations of the broader market be justified.
And when the liquidity stimulus dries up and runs its course, what then for the stock market?
Reality will set in eventually and price discovery will reflect more on actuality than hope.
So enjoy the market rally for how much longer it can last.