Gus Cosio says so

Ideas on the Philippine Stock Market

Habitual Expectations

9:30am  Wednesday   2 December 2009  Philippine Stock Exchange Index  3110.21 (at the open we broke through 3100)

All economies whether people like it or not adjusts not only to expectations of people but to habits as well.  In the Philippines, for example, people expect that during the Christmas season, consumer prices will rise. The natural behavior would be for consumers to limit purchases since prices are an economic form of rationing.  What happens in spite of prices being seasonally higher is that people spend at the same level in proportion to their income.  And so, the expected surge in consumer spending self fulfills because it is a matter of habit in the economy itself.

I have a friend who is an owner of a restaurant in one of the most popular flea markets in the metro.  She barely breaks even from March to September, but the windfall she gets from October to February make the enterprise extremely worthwhile.  She tides herself to survive 7 months of the year because the Christmas, Chinese New Year and Valentine’s season are the ones that pour out the big returns.  Her customers are purely creatures of habit who can’t help but spend at greater levels during certain times of the year.

The other day, one of our readers – Warren – asked about the Santa Claus rally and the January effect.  These terms come about precisely because of the phenomenon of habits and expectations.  A Santa Claus rally occurs because portfolio managers realize that their clients expect them to have a sexy portfolio when they disclose their year-end holdings.  Investors normally do not lay blame on their portfolio managers if the holdings in their mutual funds or unit trusts are the usual suspects – blue chips and the recent flavorful stock performers.  Fund managers, too, are conscious that they have to live up to expectations of their clients so they conform to the usual run of things.  It is almost inevitable especially in favorable markets such as the one we’ve had that people add to their portfolios this time of the year.

In the local market, the PSEi number people are looking at is 3100.  We are just about there and are likely to break out of that index level soon.  Such a break-out will almost certainly fuel the year-end rally.  I carry no crystal ball nor divining rod.  People, the economy and markets are simply creatures of expectation and habit.

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December 2, 2009 - Posted by | Financial markets in Asia

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