Working off the old market cliché that as January goes so goes the rest of the year, I’m expecting to see a decent January ahead. The reliability of this rule of thumb is often exaggerated by financial journalists, but there’s about a 70% correlation of an up month followed by an up year, so it makes sense that I want to see a good start to the year.
(By the way, January was down about 3% on the S&P 500 index last year but the index finished up 11.4%!)
On Saturday in the Switzer Super Report I argued we had a good case for believing in Australia as an investment proposition and that underpinned my positivity for stocks this year, and at this stage for 2016.
Market rules
I would argue we’re in the third stage of Sir John Templeton’s generalisation about a bull market.
He counselled that “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.”
Even the US market is more in the optimism stage, while we’re still fighting scepticism. Hopefully we will make it to the optimism stage this year but it’s fair to ask whether we could be derailed by the Yanks getting into euphoria and taking us down with them with a crash in 2015.
If we could operate in isolation, I’d say we have three for four years to go before we see a crash but Wall Street’s sneezes can give global markets a lung-crushing cold, so analysing the US’s market outlook for 2015 is relevant for us.
Before analysing the US for the year ahead, I think low petrol prices that have raised average household income by $30 a month, reduced business costs (thanks to the fall in petrol prices), low and ‘on hold’ interest rates, nice house price rises, a dollar that has fallen from 94 US cents to 80.8 US cents over 2014 and an Abbott Government that has to get economic positivity happening, will all help our stock market this year.
Our job over the year is to help you pick the best investments, which I think we did pretty well last year. For now, let’s rule out a US market crash that could make our life market miserable.
The good news for America
Here are my reasons for being US confident:
- The third year of a US presidential cycle has been great for stocks.
- The Fed won’t raise rates until, say, mid-2015 and won’t rush to do it if Europe and other global economic problems are dogging markets.
- The likes of David Tepper of hedge fund Appaloosa Management LP who sees a 10% rise in the S&P 500. This guy is not given to hopeful guesses — there’s considered analysis behind his calls.
- The S&P 500 P/E is at 16, which is low given where interest rates are. Even if it made it to 18 this year, that would still be no reason to panic.
- Central banks worldwide will be increasing money supply and if it helps growth, the US will benefit.
- US small cap companies do well in a higher dollar environment as import costs fall.
- The price to sales ratio for the S&P 500 is 1.75 and it becomes harder to make money, experts argue, when this ratio is over two, but the last time this happened was 1999, which was a great year for US stocks.
- The oil price fall will bolster US economic growth, which is already heading to be over 3%.
- Even though the US market looks poised for an OK year, many US market experts think Europe will outperform, which will be good for global growth optimism.
- US company earnings are bound to keep optimism on the rise from February onwards with industrials, materials, technology and consumer discretionary looking to be the best bets.
- Overall US economic data looks good, with Bridgewater Associates’ Ray Dalio — one of the world’s greatest investors — saying: “For now, though, the economy is fine. We’re in the mid part of a cycle. This is the easy part, the good part of the cycle.”
- David Darst, who is senior adviser for Morgan Stanley on 5th Avenue, New York, (who I interviewed a few weeks ago in the Big Apple), has the S&P 500 up 11% for total return, which includes a 2% dividend. This is a good result. “You’ll see earnings rise about 7% this [coming] year and another 7% in 2016. And then you get a small expansion in the P/E [price-to-earnings ratio] multiple from 16.4 to 16.9, times $134 [in earnings] gives you 2,275 on the S&P 500,” he said.
Buy the dips
That’s enough on why I think the Yanks won’t hurt our market this year. While a rising greenback and, eventually, rising interest rates will possibly slow down the improvement in the US economy, even the most wary US commentators, apart from the eternal pessimists, are tipping a 5-6% rise for the S&P 500.
But what I loved most is that the experts I follow are running with my mantra that I harped on about all through 2014 — “buy the dips!” Regular readers know that worked last year and it will work this year too.
In fact, there were five big dips last year. If you’d put new money to work on each one and only got half the rises, because you were scared and bought in late, you still would have pocketed 3.9%, 3.2%, 2.1%, 3.8% and 2.7%.
And if you got in at 5070 in February and sat tight to year’s end, you would’ve made about 6.7% without dividends. Buying the dip with an S&P/ASX 200 ETF remains a good strategy for 2015.
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