As the coagulation of market and economic information, data and forecasts is strung together, I’m absolutely certain that my positive predictions for stocks will come to pass. There could, however, be a slight delay.
And as you’re not fund managers (though you are your own fund manager), it doesn’t matter if your returns come in slower than you like, unless you’re thinking about sacking yourself!
Let me recap what I have been telling you will happen:
- Our S&P/ASX 200 index will get to 6000 by year’s end.
- A correction (10% drop in the index) or a memorable sell off is on the cards.
- Dip buyers could reduce the depth of a sell off, keeping the drop under 10% because a majority of smart market players believes that the current worldwide low interest rate environment has to help stocks head higher.
- The global economy will get better, with various economies recovering at different rates. This will eventually create more normal conditions of better economic growth, inflation and rising interest rates.
- Despite this, stocks will rise until interest rates on term deposits become more attractive than risking your money in the stock market, which eventually will have another big slide or crash.
- This bull market could easily be a historically long one, dragged out one because interest rates and central bank policies are historically quite unique in keeping rates so low for so long.
- Finally, we are vulnerable to an unforeseen X-factor geopolitical or even economic event that could KO my more favourable scenario. This is what we at the Switzer Super Report will be trying to detect before it’s too late.
Let me assure you, at this time, I’m still betting on my favourable scenario, and I’m investing accordingly, but the international economic scenario is a bit slower than I was hoping for. And that could easily make my gravy train for investors in stocks become a slower train coming.
Here’s a list of disappointing developments that’s making me think that market rises could be delayed:
- The IMF cut world growth from 3.7% to 3.4% last month and this was before the latest weak numbers out of Europe.
- Germany’s GDP dropped 0.2%, France had zero growth, Italy slipped back into recession and a German business sentiment survey showed Putin’s Ukraine play is rattling Europe’s biggest economy. The 18-nation Eurozone grew at 0.2% in the first quarter and nothing in the second. This economic piece in my positive picture puzzle is the one that has disappointed the most, though it’s good to see that Spain is growing at 0.6% and Finland, Sweden, Portugal as well as the Netherlands have started to grow after being in negative territory. The ECB has not done enough to help growth and needs a big, meaningful play and Putin has to back off for the sake of Europe’s growth, his own economy (which is struggling), the world’s recovery program and my positive predictions.
- And because of the above (and you could throw in the Middle East dramas as well as continuing China concerns), the Fed’s Janet Yellen won’t be rushing to raise US interest rates. This is what AMP’s Shane Oliver has said and I agree: “Against this backdrop, it’s hard to see the Fed wanting to rock the boat any time soon with talk of higher interest rates, let alone actual rate hikes, and other central banks are likely to maintain ultra-easy policy and may even have to ease further.”
This will mean our much-anticipated dollar drop will be delayed and that would make my 6000-call harder to make happen by New Year’s Eve. Of course, if we see economic rebounds and the Fed still maintaining low rates, there could be a big end of year stock market rally but making it to 6000 without a lower dollar is going to be hard.
So what’s the impact?
Apart from being embarrassed, though only a little, that my call did not turn out to be correct, the overall direction of stocks upwards will mean that I have led you down the right track but we’ve simply done it at a slower pace. It is still the right path and as a guide I can’t help it if the uncontrollable hazards have stuffed up our timetable.
The wild wilderness of wealth building will do that.
One final point on the Australian situation and this is how Oliver summed up the reporting season so far:
“We are now one quarter through the June half profit reporting season and while it’s dangerous to draw any firm conclusions early on given the tendency for well performing companies to report up front, the results to date have been reasonably good. 50% of companies have exceeded expectations (compared to a norm of 43%); 72% of companies have seen their profits rise from a year ago (compared to a norm of 66%); 63% of companies have increased their dividends from a year ago (up slightly from around 62% in the last two years); and 59% of companies have seen their share price outperform the market on the day they released results. Key themes have been continued strength for resources (notably Rio), banks doing well (with good results from CBA), ongoing cost control making up for still soft revenue growth and strong growth in dividends. The bottom line is that Australian earnings look to be on track to have increased by around 12% last financial year, with a 28% surge in resources’ profits, a 10% rise in bank profits and a 3% rise in profits for the rest of the market.”
And when that damn dollar drops, it will get even better and we will blow past 6000 like on one of those pesty plastic chairs in a cyclone.
Before signing off, remember this: if Europe eventually comes good, say into 2015, and the US economy keeps on improving (which I think will happen), and the Fed keeps rates lower for longer as it await a more hospitable global economic environment, then we could see another big stock market burst.
Why?
Because if things are coming up economic roses and rates are still so low, where will investors put their money? Answer: stocks!
The great economist, J.M.Keynes once observed:
“In the long run we’re all dead” but, God willing, I’ll be right on stocks heading up before that time.
Important: 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. Consider the appropriateness of the information in regards to your circumstances.
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Also in the Switzer Super Report:
- Paul Rickard: Telstra’s off-market buyback – accept in pension [2]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [3]
- James Dunn: Big week of earnings: BHP, Wesfarmers and Coca-Cola Amatil [4]
- Nathan Lim: 9 reasons coal is struggling [5]
- Staff Reporter: Shortlisted – OnTheHouse and Genworth [6]
- Staff Reporter: Auction clearance rate steady at 68.4% [7]