With the US job numbers telling us “believe in the US economic recovery” and “QE works, albeit with a lag” it’s time to test my cautious positivity on stocks. I hope one day I have dropped the “cautious” bit but that will only happen when I’m certain that economies are responding to everything that central banks from Washington to Frankfurt to Beijing to Tokyo to Sydney have thrown at them.
I think 2016 will be better for economies and so I am more positive on stocks, but it won’t be hard to beat this year’s showing when it comes to shares.
At home we started at 5,411 on the S&P/ASX 200 index, topped out on April 13 at 5,996.4 before falling below 5,000 and then recovering to where we were today at the start of trade at 5,151.6.
On October 26 we saw a high of 5,384.8, so I guess it’s not beyond imagination that December could give us a Christmas gift of a Santa Claus rally which leaves us in positive territory for capital gain and there should be more when you throw in dividends and franking credits. All we have to beat is 2.5% from term deposits to justify punting on stocks that might have delivered you a 5-7% gain.
It might be too much to ask of December to take us over 5,411 but if history is a good guide we are a chance for some festive cheer.
The great 211,000 jobs in November in the USA will help stocks with the Dow Jones index up 370 points after the employment report. Mario Draghi also added positivity with a new take on his “whatever it takes” promise.
Of course narrowing the comeback of stock prices to December for the sake of some annual assessment of your super fund’s or your portfolio of stocks performance is really small beer. The real test is, are your stocks heading up over the next few years? Will the index drive over 7,000 and how many years are left in this bull market?
My guess is that there are at least two years to go, but I suspect it will be longer and what will determine the longevity of this slow grinding higher stock market cycle will be economic performances of the global and local economies. And then there should be an earnings dividend if the economic news keeps improving and this will spark a spike in stock prices.
That’s the theory, so how is the real world going?
Here’s why I like our economy and therefore stocks for next year:
- Business credit rises at the fastest rate in six and a half years in October.
- Company profits have risen for the first time in five quarters in the three months to September.
- Sales rose in 12 out of 15 industries in that quarter.
- The Performance of Manufacturing index lifted by 2.3 points to 52.5 in November, the highest reading in two years and any reading over 50 means the sector is expanding!
- And our September quarter economic growth was the fastest in 18 months at 0.9%, which brings the annual growth rate to 2.5%. If we were in America, we’d take the 0.9% growth rate and multiply it by four and say we’ve grown at a 3.6% rate!
- Sydney house prices have fallen at the fastest rate in five years — down 1.4% — but it’s not huge considering the three years of double-digit growth and it’s exactly what the RBA wanted.
- The last jobs number saw employment up 58,600 while unemployment went from 6.2% to 5.9%, which was hailed as too good to be true.
There’s a lot of that at the moment and there’s so much that I’m starting to think it’s looking truer by the day. Add this further good news to the above:
- In rolling annual terms, a total of 1,146,194 new vehicles were sold over the year to October – a record high.
- Total new loans (personal, business, housing & lease) rose by 6.4% in September to a 7½-year high of $75.3 billion. It was the biggest monthly rise in lending in eight months and it went 0.7% higher in October!
- The Sydney-Melbourne airline route is a key indicator of business activity. Passenger numbers in September were a record for a September month. Smoothed annual growth is the best in two years.
- The Westpac/Melbourne Institute index of consumer confidence rose by 3.9% in November to 101.7 – the highest reading since May 2015.
Nearly all of the readings above a “best in so many years or months” and suggest to me that the economy is turning.
Meanwhile, I don’t like tipping commodities but I suspect we are around the bottom and so I’m not expecting big falls in prices like we have seen over the past year. Stocks connected to commodities might still have a tough year ahead, but the worst could be over and even if prices fell some more it should be a smaller fall.
And so now let’s see what the international economy picture looks like:
- The USA with those job numbers and with the Fed set to raise rates because the economy looks good, then this economy should be crucial to the global economic picture.
- This is what the European Commission said on November 5: “The economic recovery in the euro area and the European Union as a whole is now in its third year. It should continue at a modest pace next year despite more challenging conditions in the global economy.” I also believe Mario Draghi only did less than what the market expected last week because he has a more positive view on the outlook for the Eurozone than the market experts.
- China is a bit of a worry with the OECD now expecting the global economy to grow 3.3% next year, downgraded from 3.6% in its September forecast, and China’s slow down was seen as a big cause. Growth in China is now projected at 6.5% in 2016 and 6.2% in the following year as its economy faces sluggish manufacturing investment amid excess capacity. I think Beijing will respond with stimulus measures and I also think we watch manufacturing too much, which is becoming less important as the Chinese economy transforms into a greater services economy. “The October trade data keeps pressure on for more domestic easing,” said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. “Measures are likely to continue to focus on shoring up domestic demand rather than weakening the currency. And over time the role of fiscal policy expansion should rise.” I won’t underestimate what China might do to push up growth and that will help our economy as well.
- Japan has had some problems with the economy going into a recession for the second time in 18 months! However, this is what Focus Economics observed: “Nevertheless, there were some positive developments, including a strong recovery in exports and private consumption that, if sustained, has the potential to boost growth in Q4. In an attempt to shore up economic activity, the government is considering a supplementary budget for this fiscal year in the range of JPY 3.0 trillion to JPY 3.5 trillion (USD 24 billion to 29 billion). The plan could include funds to support the agricultural sector and boost social spending.”
Conclusion?
Given that QE works slowly or with a lag and given that more stimulus is likely for some of the strugglers out there in the global economy, and many of them will benefit from a lower currency, like Australia, I think there is a good reason to remain positive on shares.
If the economic outlook was turning to seriously negative then it would be M-A-D to be pro-stocks and so I think I’m backing a winner being long stocks. That’s my story and I’m sticking to it until it becomes sensible to change it.
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