Asian Stocks Are on the Rise: What Does This Signify in the US?
It has been a good few days for stocks across the world.
On Wall Street, the S&P 500 rose to a record high, oil and commodity prices are climbing, and the U.K. seems to have calmed down in the aftermath of the Brexit vote amid Theresa May becoming the new prime minister.
But some of the biggest news is coming from Asia. Stocks in Hong Kong, Seoul, Shanghai and Tokyo have risen strongly, with Japanese stocks climbing for a third straight day.
Investors appear confident that the recent electoral victory by the ruling Liberal Democratic Party in Japan signifies a continued commitment to economic stimulus, which is just what Prime Minister Shinzo Abe prescribed on Monday.
So what does this mean for American investors? Some might view this as a sign that the global economy may start booming again, and the recent successes in Asia should be a highly encouraging sign.
But there are still plenty of concerns about the long-term effects of the Brexit and the weakness of a global economy that seems to require continuous stimulus spending. Caution was the order of the day following the Brexit, and nothing since then has significantly changed that.
The key is that investors need confidence, according to some financial analysts.
"In the light of the Brexit and continued political fighting within the United States, it seemed like there was little reason to have confidence," said Marwan Naja, chief executive of Swiss private-equity firm Manixer. "But the impact of these events appear to have stabilized, as equities have recovered the losses taken in the Brexit's immediate aftermath and America had a strong June jobs report."
And the recent news out of Asia should also help bolster confidence.
Some of this confidence exists because of company developments. For example, Nintendo's stock rose by 12% on Tuesday after similar gains last week off the global mania surrounding Pokemon Go.
But investor confidence is mainly because Japan and other Asian countries are continuing efforts to stimulate their economies.
The electoral victory by Abe in the House of Councillors has investors expecting future stimulus. Abenomics has tried to bolster the economy with increased stimulus spending and printing more money.
Abe's victory indicates that Japanese voters remain content with such an approach, He has already discussed implementing another fiscal stimulus where the Japanese government would spend an additional $200 billion.
If investors remain confident in the health of the world economy, thanks to the performance of Asian companies and further government stimulus, that can lead to more aggressive investing and spending, which can thus help the American economy and stocks.
But while investors may be hopeful about a new wave of stimulus spending, there remains the concern about just how long Japan can keep spending in attempt after attempt to bolster its economy. This year, the Bank of Japan implemented negative interest rates with certain banks as an attempt to persuade Japanese citizens to spend more and save less.
But what this actually did was encourage Japanese citizens to take money out of the banks altogether, decreasing the amount of money in the economy. This isn't the only example of failure, as earlier spending efforts by Abe have failed to gather fruit, so why should this new one promise different results?
And not all the news from Asia will bolster investor confidence. On Tuesday, an international tribunal in The Hague ruled in a dispute between China and the Philippines that China overreached by making claims on what has now been ruled to be Filipino territorial waters.
China will likely not take this ruling lying down.
None of this is to suggest that the Pacific is on the verge of a new Cold War. But in a political environment already rife with worrying news for investors such as the Brexit and the American presidential election, continued strife among China, the Philippines and the rest of Asia could hurt U.S. stocks.
Stocks across the world have rebounded from the initial post-Brexit collapse, but that doesn't mean that happy days are ahead for the U.S. or global economy. Investors may be confident now with the prospect of further Japanese economic stimulus, but there is no guarantee that the stimulus will actually bolster the Japanese economy.
And while the news of stock market growth is certainly not bad for the U.S., its effects in and of itself will likely not be that valuable. The biggest effect that these news items can have is in helping or harming investor confidence.
But as there is already bad news in the rest of the world, more worries can compound shakiness.
Consequently, now is the time for investors to play things safe.
Things are calmer now than they were a few weeks ago, but worries still bubble beneath the surface. When the prospect for true economic growth appears, then is the time to seriously start investing in U.S. stocks again.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.