What could explain the dramatic rise in the Straits Times Index since the start of 2006?
The answer: Nothing.
Fundamentally, the economy has not changed between the end of 2005 and the start of 2006. Yes, the economy is set to grow 3%-5% this year, with private sector economists expecting the government forecast to be beaten. Yes, interest rates are expected to top out after one, maybe two more hikes by the Federal Reserve. But we knew that already, too. And those factors don't automatically relieve the US generally or US consumers specifically - who are important customers of Singaporean manufacturers and service providers - of their high debt burdens. Plus the administration in Tehran seems intent on using its nuclear research program as a bargaining chip for higher oil prices. Where are all those people who said oil at US$60 per barrel was going to cause some companies to collapse? The rally, which has since lost some of its inertia, is more likely driven by traders emboldened after spending some time relaxing on a beach in Phuket than by new facts.
That's not to say the market can't rise further. But investors should avoid jumping on the bandwagon just because everyone else is. It gets pretty crowded up there. Caution thrown to the wind has a habit of being blown straight back in your face.