Should we sell up now?

Founder and Publisher of the Switzer Report
Print This Post A A A

With US job numbers disappointing over the weekend (in fact, they came on Good Friday while the stock market was closed) and with predictions that the upcoming earnings season in the States will also disappoint, is this the time to sell ahead of May and go away?

A taxing issue

Obviously, for long-term investors our goals as well as the capital gains tax implications for non-retirees means selling off fast is not an easy option to consider. But then there is the old rule of investing that says tax shouldn’t be critical in your investment decisions; I reckon this rule was made up years ago before anyone had heard of franking credits.

On the other hand, if someone avoided going to cash in December 2007 after the market’s first fall because of capital gains tax issues, they undoubtedly regretted it when Lehman Brothers failed and the market crashed again.

Regular readers know I have been tipping a pullback for some time, but I maintain my view that this year will not be a rerun of 2011 where we saw a massive slump in shares in August and September.

Out of left field

That said, there could be a left-field event that I can’t see right now and if I had to list what they might be, I would say it could be:

  • A PIIGS (Portugal, Ireland, Italy, Greece and Spain) debt default concern, but I do think since the European Central Bank (ECB) threw a trillion euro at the problem, there is less to worry about this year compared to last.
  • Next, it could be problems in Iran and oil spiking, threatening a global recession, but my geo-political sources say this could fester along until the US presidency race is over and so it could be something for 2013.
  • Some might throw in economic concerns in China, but I think it is already showing signs that we can rule out a hard landing.

That’s about it, and this convinces me that we are looking at a correction from the big run-up of the markets since October 2011 and especially since the start of this year.

If you look at charts of US indices, QE1 (quantitative easing package one) kicked off the first big rise in stocks in 2009, then in 2010 along came QE2 and this was followed by Operation Twist, where the US Federal Reserve bought long-dated bonds to lower long-term interest rates and they paid for it by selling short-term bonds.

Some experts think QE3 will come along to help the market, but that would only happen if the US economy falls into a hole. I can see a slowdown and in fact RBS Morgans chief economist Michael Knox says his economic modelling is tipping a slower US economy in the second half of this year.

My outlook

My view is we are looking at an overdue pullback where there will be buying opportunities on the dips. JPMorgan’s US strategist, Thomas Lee, sees it the same as me. He told CNBC that the negative jobs report, which showed that 120,000 new positions were created in March compared with an expected 203,000, is a little misleading as a predictor of the jobs market. He thinks the trend for weekly jobless claims is more reliable and this has been telling a more positive story for the US economy.

Lee expects ‘growth scares’ coming from Europe and China over the next few months and now US job market concerns have arrived. However, against this he sees a housing recovery happening, companies with solid balance sheets and plenty of cash and low debt, and with valuations at 60-year lows.

In summary, expect some anxiety and sell-offs over the next few months, but at year-end, there will be rallies. Of course, the next three weeks puts the latest round of company reports into sharp focus.

By the way, I expect rate cuts here in coming months and a lower dollar locally, which actually could help our stock market.

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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in the Switzer Super Report

Also from this edition