With the bond market’s prediction via its bond curve inversion looking like “a bunch of old fooey”, the question has to be: Are the signs aligning that will help this stock market rally keep going? I told you on Saturday in my weekend Switzer Report how one US market expert has upgraded his target number for the S&P 500 — but he’s not alone.
Tom Lee of Fundstrat Global Advisors now expects the US market index, which is now at 2945.6 to beat 3125 this year. That’s a 6% gain from here and that would be on top of the 17% gain that the Yanks’ stock market has already put on.
This scenario would be great for our market, which needs positive momentum after the May 18 election. Our market has been held back by APRA’s excessive crackdown on lending, which regulators are working on to make less restrictive.
Meanwhile, the Royal Commission has reduced upward share price action for financial companies, with the cost of remediation and brand damage acting as drags on their share prices and market indexes as well. And the election itself, as per normal, has acted as a brake on business and consumer confidence, which can’t be great for share prices.
So is this predicted US market gain possible?
Even though Wall Street, which will decide the fate of stocks, is in the 10th year of a bull market, the gain is only around 335%. The stats on bull markets go like this:
- Average bull markets last 9 years and rise 480%.
- The 1980s bull market lasted 12.8 years and rose 845%.
- The 1990s bull market lasted 12.9 years and rose 816%.
- The longest was the 1950s — up for 15.1 years and rose 935%!
So timewise, the US market looks long in the tooth but this is an average number that’s made up of shorter and longer bull markets. On the most recent experience, this bull market is “short in the tooth.”
Adding more positive history to my hopes for a higher stock market is the fact that the third year of a US Presidency is the best. Ned Davis Research showed the median rise for the index since the 1950s was 18.5% and the fourth year is the second best!
Right now, we await a trade deal between the US and China and there are rising hopes that this will happen this week. We’ve recently learnt that Beijing is so happy about the apparent success of its stimulus programme that it’s thinking about curbing its enthusiasm for economy-helping spending.
In the US, Friday’s job report saw the jobless rate hit a 50-year low, dropping to 3.6% from 3.8%, while the rise in jobs created was 263,000 over April, against a market guess of 190,000. That’s a big beat! Meanwhile, the rise in wages, up 3.2%, indicates that workers are starting to share in the economic upswing and maybe that elusive inflation will eventually show up.
However, until it does, the Fed won’t raise interest rates so another threat to a stock market rise is left on the sidelines. And this comes as US earnings have come in better than expected, while bond yields are extremely low, both of which are good for stock prices.
“We’re in this Goldilocks world right now, where it’s not too hot, it’s not too cold and it seems just right,” said Tom Plumb, a money manager at Plumb Balanced Fund in Madison, Wisconsin. “It’s going to be a risk-on environment for stocks. People will put money in the stock market because there will be companies that will capitalise on world economic growth.” (AFR)
On the local front, some economists think we’ll get an interest rate cut tomorrow but I doubt it. One is out there if the economic data remains uninspiring but I’m not so sure the RBA wants to give up its ammo of rate cuts in case a “black swan” prompting a global recession sails into our economic lives.
And while that’s one argument, history supports the notion that a rate cut is possible. “The first-quarter CPI disappointed and the last time that happened, in 2016, the RBA followed it up with a rate cut,” observed Michael Blythe, the chief economist at CBA.
I agree with the Morgan Stanley’s equity strategy team, who can’t see the RBA changing its mind on cuts right now. “In our view, recent data have not moved enough to shift the RBA from its view stated in its previous meeting that it will ‘continue to monitor developments’.”
Adding more positive fuel to my fire was a trend last week that suggests central bankers are becoming more positive on the economic outlook. If that surprises you, note the following from the AFR:
- Bank of England chief Mark Carney said interest rate increases in future “would be more frequent than financial markets currently expect” if growth and inflation pick up as it expects over the next two years.
- The Federal Reserve chairman Jerome Powell said the US central bank suspected “some transitory factors may be at work” on inflation, which made money markets drop their guess that rates might be cut in the USA, despite President Trump’s desire to see them go lower.
- “Perhaps the most surprising news on growth came from the eurozone, where economic growth accelerated to 0.4 per cent in the first three months of this year, recovering from a slump in the second half of last year. Unemployment hit a 10-year low of 7.7 per cent in March.” (AFR)
The stars are seemingly aligning but wait, we now have another Donald trumping of confidence, with the Dow futures down 400 points and our market heading south! The latest trigger was a Trump threat to re-escalate the threat of tariffs on $US200 billion worth of Chinese goods. Of course, this is another Trump play, which could create another buying opportunity, as this President under pressure can’t afford a real trade war, a stock market collapse and recession ahead of the 2020 US Presidential election.
When it was expected that the trade deal would be inked this week, this comes as just another curve ball in Trumpland. The President is bound to talk tough but he has to get a signed deal to take stocks and confidence higher. Until this typical Trump do-the-unexpected stunt happened, all the stars were in alignment for stocks to go higher but, as we’ve learnt since November 2016, with Donald you have to expect the unexpected!
That said, my economic/market telescope is still telling me that nearly all the crucial stars are just about in the right line, despite having to deal with that old ‘sell in May and run away’ curse for stocks.
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