Newsflash – the Dow failed to make it to all-time highs 10 days in a row but is up a whopping 10.76% in less than a quarter! That’s huge, but what can go wrong and how should you be playing it?
Of course, how you play it depends on who you are, your risk appetite and how lucky you might think you are. My 2013 strategy is to be in stocks. I expect a pullback but easily could be wrong if this is one of those bull markets in a historical minority.
[1]Downside risks
So what can slow down this rally? And let’s rate the likelihood of each thing happening. Here goes:
- The Fed boss, Ben Bernanke, changes his mind and stops, or reduces, QE3 from the $85 billion a month being pumped into the US economy. (Not likely this year but possibly in 2014. Recent data is good but is not gangbusters boom-like and so I reckon Benny is on our side.)
- The US Congress stops kicking the can down the road. (There is a deadline of March 27 for more fiscal funding and if nothing is agreed to, then the US government starts shutting down. Talk is this will be delayed to May, so more negotiating can happen. This worries me a little but I expect the can will keep being kicked, as it should be, for another two years.)
- The Europeans act like Europeans and do what’s good for them and not the EU. Italian voters aside, these guys have been on better behaviour – not best, just better! Over the weekend the EU got creditors to construct a 10 billion euro bailout deal for Cyprus. Cyprus accounts for just 0.2% of the combined Euro zone economy but officials claim it had to be bailed out to safeguard the principle that no Euro zone country could be allowed to default and compromise the credibility and integrity of the single currency. Add this to the strong showing from the ECB’s Mario Draghi and I’m OK with Europe. European stock markets have also been going up like there is a better Europe on the horizon.
- China’s property bubble bursts? Could happen but a new Chinese leader will move heaven and hell to make sure it does not happen on his watch. It’s a ‘happen one day’ thing, like most countries, but I’m not worried about it for 2013.
- China’s economic data heads south. Same as above and the fact that the US is recovering, Japan is spending, the EU is better than last year and the ASEAN countries are growing strongly, means this probably won’t happen. I’m in Vietnam now and this place is rocking!
- The big market push up with the Dow and the S&P 500 up in the 10% neighbourhood in less than three months means if you add in the “sell in May and go away” tendency in the USA when summer kicks in, then profit-takers could easily create some action.
If they do, I’ll be a buyer when I think the time is right. But if you don’t want to gamble, the likes of the banks are all paying dividends over 5% and, with grossing up, you should be in the 7% department or more. Not bad for stocks that many would be happy to hold for a damn long time.
It’s all about the numbers
For the week ahead, there’s important housing data but the Fed will be the top act. When Ben speaks, we all listen but I’m not expecting anything annoying from him.
There is also manufacturing data from China and Germany which I will be keen to see but here is my fact for the week: Since 1950 the Dow has risen 8% in the first quarter 12 times! That’s 12 out of some 63 years and when this has happened, the index has ended the year in positive territory every time! And get this, it has finished with double-digit gains for the year 10 times!
I know I went long on exclamation marks but these are great historical facts that make me believe in my call even more than I did before I seized on this revelation. Hooray!
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Also in the Switzer Super Report
- Paul Rickard: Bond market ‘Armageddon’ draws nearer [2]
- Penny Pryor: Clearance rates strong in lead up to super Saturday [3]
- Lance Lai: Chart of the week – US S&P500 – Bullish extension in play [4]
- Rudi Filapek-Vandyck: Weekly broker wrap: DJS, MYR and NAB all downgraded [5]
- Tony Negline: If you ask the ATO, give them all the facts [6]