My final Saturday report for 2013 means there can be only two really important questions to tackle. The first has to be: can I build the case for stocks next year, again! And second, if 2014 is another up-year, then what do we buy? Let me concentrate on the first question, which will make ETF players happy, then I’ll touch on some sectors and a couple of companies I like. Of course, when it comes to companies we think have potential, that’s what we do each week, so that will be our never-ending story for the years ahead.
But, let’s start with what I expect for 2014.
In a nutshell, I see Wall Street having another good year but not as great as 2013. Have a look at some of the milestones the Yanks created over 2013:
- The Dow’s annual gain looks set to be the best since 1996.
- There were only two down-months over the year.
- Of the 248 trading sessions completed in 2013, the Dow industrials have closed at an all-time high 50 times, while the S&P 500 has finished at a record high 44 times.
- US economic growth went up to 4.1%
- At the end of 2009, the US budget deficit was 10%, then went to 5.7% by March 2013. By September 30, it was 4.1%. It’s expected to go to 3.4% next year, with the long-term average for the USA being 3.3%! That’s a huge fiscal improvement.
I could go on but I want to focus on the future.
Back to the future
My central premise for stocks locally is that economic growth in the USA, Europe, Japan and Asia will help global stock markets, with Wall Street remaining largely positive. There’ll be some dramatic moments because of the huge gains last year and a 5-10% correction looks likely some time late in the first quarter, but it will be a buying opportunity.
Locally, I’m arguing that our economic growth will end up being better than the 2.5% many experts, including the RBA and Treasury, are tipping. I think low interest rates and a lower dollar – it was 88.67 US cents this morning – will help bring on better growth that will push up earnings and justify higher share prices.
Our S&P/ASX 200 index is only at 5324, while our all-time high was around 6800. Even if we pull this back to 6300 to account for post-GFC capital raisings, we still have 1000 points to go. This makes me solidly positive on stocks next year and so does the survey of the American Association of Individual Investors (AAII), which showed 55% of those surveyed expect the rally to continue for the next six months, while only 18% disagreed. That means we have about four bulls to every bear. Ominously, the last time that happened was 2007! However, valuations of US companies are miles better than they were then.
Sure, I think 2014 will be more risky than 2013 because the rally has been going since 2009, but interest rates are too low for me to be worried. Also, economic growth is rising. Over the past 100 years when the US stock market was up over 20%, then 75% of the time the market went up in the following year. The average gain was 8.5%, which would be a nice advance for the Yanks and would be enough to help our market play some catch up. The lower the dollar, the bigger the catch up and I expect our currency to head lower over 2014. Sorry travellers (I’ll be one too).
By the way, in the past 18 times that the US market was up in December, it went up 14 times again in January.
Let me divert for a moment (to reinforce my positive view for next year) by looking at the French economy, which grew by 0.1% in the third quarter. This is a struggling European economy at the moment but it still got into positive territory. The Dutch grew at 0.2%, when 0.1% was expected. In summary, the economic story continues to come in the “better than expected” department and this is solid support for my optimism. It will be my big watch for the year ahead and I will be cheering numbers, like the latest US consumer sentiment figure, which was, wait for it, at a five year high!
Also global manufacturing numbers are getting better in nearly every survey and the Baltic Dry Index, which is a good world trade indicator, is now at a two-year high!
What has me worried?
To be frank, my biggest concern is China and its cash crunch. Understanding the Chinese threat will be an early research task for yours truly and it looks like the only real concern that could rock global markets. On the other hand, as China is still a government-controlled economy, with some free enterprise thrown in, the authorities can bury many problems that would KO a real free-enterprise economy.
What sectors to watch
A Deloitte report pointed out that mining is not the only wave Australia can surf to a better economic future. It nominated the following five sectors as the ones with real potential –
agribusiness, gas, tourism, international education and wealth management.
We’ll be foraging out the best companies in these sectors in coming weeks to make sure we’re on the best of breed in these sectors.
I like Woolworths and CSL as two companies I want to hold more of this year. I will save my analysis for these companies for 2014.
Have a great New Year’s Eve and I’ll see you next year!
Top stocks – how they fared
Numbers that moved the market
There wasn’t much going at the beginning of last week, aside from Santa tracking, but a big rise in US consumer sentiment to a five-month high on Monday, certainly got things off to a good start.
The Thomson Reuters/University of Michigan final index of consumer sentiment rose over 7 points to be 82.5 in December. Later in the week the market was buoyed by a reduction in initial jobless claims in the US, as they fell to their lowest level in a month. The Department of Labor reported that initial claims fell 42,000.
The week ahead
Australia
December 31 Private sector credit (November)
January 2 Performance of Manufacturing (December)
January 2 Home Value index (December)
Overseas
December 30 US Pending home sales (November)
December 31 US Consumer confidence (December)
January 2 US Construction spending (November)
January 2 US ISM manufacturing (December)
January 3 US Auto sales (December)
It will be another thin trading week, with the market closing early on New Years Eve and closed all day January 1, 2014, making it the perfect time for getting your finances in order.
There is still a raft of data out in the US, which should all point to an ongoing pick-up in their economy.
It will be a fairly quiet week on the domestic front and Home Value Data, to be released by RP Data and Rismark, will confirm a bumper year for the property market.
Calls of the week
I predict that 2013 will be one of the best years on record for the Boxing Day sales. The Australian Retailers Association is already estimating that $2 billion went through the tills on Boxing Day, and that a total $15.1 billion will be sold at the Boxing Day sales through to mid January, which is up on the $14.5 billion sold last year.
And to all of those who make New Year’s Resolutions but then wonder why you can’t stick to them, read this to find out why.
Stocks Shorted
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short – which could suggest investors are expecting the price to come down. The table also shows how this has changed compared to the week before.
It’s a very similar table to last week today. However the stock with the second biggest short position in our table last week – Kingsgate Consolidated – has totally disappeared from the top 20 this week.
My favourite charts
The following chart shows business confidence and consumer sentiment in 2012 and 2013. Business confidence is still on a post-election high but consumers are not so convinced.
Top five clicked on stories of the week
Charlie Aitken: Picks for 2014 part 2 – three large-cap calls
James Dunn: Eight stocks to drop
Margaret Lomas: Six mythbusters for 2014
Penny Pryor: Buy, Sell, Hold – what the brokers say
Roger Montgomery: Measuring the shonks – or how to value a company
Recent Switzer Super Reports
Thursday, 20 December 2013: Merry merry merry Christmas
Monday, 16 December 2013: Better watch out
