Despite lower than expected gross domestic product (GDP) numbers in the United States, Wall Street still managed to spike higher over the weekend. But can it last? The Dow is up 8.27% for the year so far, the S&P 500 is up 11.59% while the Nasdaq has wacked on 17.81%, but a lot of that has been driven by the irrepressible Apple.
US firms have really beaten the Street with 73% of the 287 companies in the S&P 500 that have reported having slam-dunked estimates for earnings. On top of that, investors aren’t nervous with the VIX – or fear index – down at 16, which is a low reading.
Meanwhile locally, the Reserve Bank of Australia (RBA) is expected to cut interest rates tomorrow and more cuts are tipped to be on the way, which should weaken the dollar a bit and help stocks in Australia that have been labouring under both relatively high interest rates and Aussie dollar.
Watch out!
So what can bring this nice little story for investors undone? Try these:
• May arrives tomorrow and historically stocks have been sold off, a phenomenon that can last until October. This has held true for the past two years.
• France and Greece go to elections this week as a wave of anti-austerity sentiment sweeps across Europe.
• The UK went into a double-dip recession last week.
• US economic growth fell from 3% in the December quarter to 2.2% in the March quarter and the March jobs report was disappointing.
• There’s been some big market rises so far this year and the predictions that the S&P 500 would hit 1,400 have already been met, so this could lead to profit-taking soon.
• Question marks hang over Spain (unemployment is at 24.4%!) on whether its debt problems will spark bank and financial system concerns like Greece did last year. However, Spain is too big to let fail and that worries some experts.
The good stuff
Against these worries, there are some positives out there and so consider these:
• The USA’s company reporting shows how solid the corporate sector is. Experts tipped 2% profit growth and it looks more like 6%.
• US consumer sentiment is still rising and consumption is on the rise too.
• China’s economy has shown it has avoided a hard landing.
• The Chinese yuan is appreciating, which would help global demand.
• The European central Bank (ECB) is more hands on under Mario Draghi and he speaks this week after an ECB meeting.
• The EU rescue funds have more money in them than last year.
• The International Monetary Fund (IMF) raised global growth forecasts — let’s hope they are right!
• A lot of bearish experts, such as US banking guru Meredith Whitney, are turning bullish.
• On the local front, I think the RBA will cut rates a few times and that will lower the Aussie dollar, which will help the local stock market play catch up on Wall Street.
The bottom line
The balance of concerns out there still worry me, but I was happy to hear Chris Cuffe of Third Link Investment Managers has turned more bullish this year, though he thinks there will be some tests between now and the end of the year.
One thing is for certain, when the worst is behind us, the market will have already factored it in and the very cautious will have missed a lot of the first big jump in stock prices. Unfortunately, share playing is a game of risk!
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.
Also in the Switzer Super Report:
- George Boubouras: Six foreign shares to diversify your SMSF portfolio [1]
- Paul Rickard: Budget preview: five potential changes to the cap [2]
- Tony Negline: Federal budget preview: make contributions now [3]
- Rudi Filapek-Vandyck: The broker wrap: four stock buys [4]