It’s a new year for playing the market and while there are always important questions we want answered before we invest, the most important one is: should I stay in the market in 2014? The simple answer is yes and I will build my case for the affirmative in my upcoming Monday report.
Suffice to say, I’d be happy to see a 10% rise in the S&P/ASX200 over the year. If you throw in 5% for dividends, then there’s a base case for a 15% payoff. And for those who can gross up, we’re talking 16-17%, which has to be a compelling case for being in stocks.
But what about the warnings of Dr Marc Faber and other Doomsday merchants that a 20% correction is out there waiting to happen?
If you type Switzer and Faber into Google, you see he was talking a 10% correction in August 2012 and then a 20% one in 2013. One day he will be right, but you’d have missed a lot of capital gain and dividends if you’d taken his forebodings too seriously.
I think we’ll see a sizeable pullback this year because the Yanks had the best year in a decade, and indicators such as the Russell 2000 Index, which is a key small cap index, has been sliding pretty noticeably in recent weeks. It was a huge gainer in 2013, going up close to a whopping 36%! Who wouldn’t expect some kind of pullback or correction after that kind of rise?
Anyway, any pullback will be a buying opportunity.
The trouble is guessing when. Using history as my guide (though it’s not always reliable), I believe the market will go up this year. I wouldn’t be surprised to see 6000 on the S&P/ASX 200 index at some time, and I’d have to expect January to be a good month – not a great one, a good one.
This is based on the old maxim “as January goes, so goes the year.” It’s called the January Barometer, which says if the market is up in the month, then there’s a high likelihood that it’ll be up for the year. On top of that, January is a notoriously great month for stocks, so I’ll be watching the next three weeks very closely.
In a nutshell, I believe that with the improving global economy plus the expectation of a lower Aussie dollar, low interest rates and rising house prices, coupled with a good outlook for resources (if you can believe the experts who track the mining industry), our market could easily play catch up with Wall Street.
Recall that most economists, along with Treasury and the RBA, are tipping local economic growth of 2.5%, but I’m in the 3% or higher camp. Recently, CommSec came up with a prediction of 2.75% to 3.25%, which gave me more comfort.
Other CommSec forecasts include unemployment to top out at 6%, which is more optimistic than the average guess out there, while they put the dollar in the 88-94 US cents range. I never trust dollar guesses, as it has a common range of 13.7 cents in a year! Despite my travel plans, I hope that the little Aussie bleeder can see at least 85 US cents this year to help the economy and the stock market.
Blackrock’s Stephen Miller thinks it will go to 80 US cents but he has a far more negative view on the economy and, therefore, expects two more rate cuts from the RBA! I hope he’s wrong for my economic forecasts’ accuracy and my travel plans!
On what caught my eye, while you were holidaying, I continued to walk the ‘Wall’ of the New York Stock Exchange and other markets. The following was noteworthy:
- The US jobless claims continue to fall
- The US ISM manufacturing figure rose from 54.7 to 55.0 in December, which was the best growth in 11 months.
- US consumer confidence had the biggest yearly jump in 16 years.
- US home prices are heading up still, with the S&P/Case-Shiller Home Price index up 13.6% in the year to October.
- Since 1930, during mid-term election years, market pullbacks can be aggressive, with the average pullback being 17%!
- According to CNBC, since 1945, the S&P 500 has posted 21 annual gains of more than 20%. The average gain the next year was 10%, with the index up 78% of the time. However, every one of those “good” years saw drops of at least 6% and up to 19.3%. Four of those years triggered new bear markets.
There are heaps of other observations I’ll share with you on Monday when I build my case for another bull year. Spare a thought though for the Cubans, who now will be allowed to buy cars on the open market with no government interference. Right now, the cheapest new car is a Peugeot for $91,000, which is pretty steep, but it’s even more so when you know the average wage of a Cuban is $21 a month!
I can’t help but think of my favourite J.F.Kennedy quote made during the Cold War, which went: “Freedom has many difficulties, and democracy is not perfect, but we have never had to put a wall up to keep our people in!”
Numbers that moved the market
As the equity markets slowed down for the end of the year, attention turned to the property market and the RP Data – Rismark Home Value Index. According to the index, home prices rose for the seventh consecutive month in December and are up 9.8% over the year. They rose by 8.4% over the past seven months, which is the biggest gain in four years.
The Performance of Manufacturing Index was flat, and unchanged at 44.3 in December . A reading below 50 indicates that the sector is contracting.
Globally and locally, markets were lower towards the end of last week, partly on softer Chinese manufacturing data. The HSBC China Purchasing Managers’ Index fell slightly to 50.5 in December, from 50.8 in November .
The week ahead
Australia
January 7 Â Â Â International Trade (November)
Westpac Consumer Confidence (January)
January 8 Â Â Â Job Vacancies (November)
January 9 Â Â Â Retail Trade (November)
Building Approvals (November)
Overseas
January 6 Â Â Â HSBC China Services PMI (December)
US Factor Orders (November)
US ISM Non-Manufacturing PMI (December)
January 7 Â Â Â US Trade Balance (November)
January 8 Â Â Â Chinese CPI, PPI (December) and GDP (Q4)
January 9 Â Â Â US Initial Jobless Claims (January 3)
January 10 Â Â US Non-farm payrolls (December)
US unemployment rate (December)
Things should get back to normal next week, as workers return from their Christmas/New Year breaks and volumes pick up on markets. A rash of US data will provide further evidence of a pick-up in that market as the country prepares for tapering of Quantitative Easing.
Calls of the week
My biggest call of the week is an Ashes whitewash. On the first day of the fifth test, Australia were bowled out for 326, but it’s not over yet. The last time Australia managed a 5-0 score was the series of 2006-2007 .
I also predict that after a lull in December, the Westpac Melbourne Institute consumer confidence data out on Tuesday will show a gentle increase in consumer sentiment.
And of course the annual results of our Switzer Super Report portfolios will be updated on Monday. They will definitely have performed well over 2013.
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.
Monadelphous Group has jumped into first place and now has the largest short position of over 15%. UGL Limited has also moved up the scale with the biggest change over the week.
       
My favourite charts
The following chart highlights the growth in the Australian property market over the past year and in particular the greater annual changes in NSW and Western Australia.
Top five clicked on stories of the week
Charlie Aitken: Picks for 2014 part 2 – three large-cap callsÂ
Maureen Jordan: My SMSF
James Dunn: Eight stocks to dropÂ
Paul Rickard: Portfolios hold ground in NovemberÂ
Peter Switzer: 2014: a year for stocks?Â
Recent Switzer Super Reports
Thursday, 2 January 2014: Best of the bestÂ
Thursday, 20 December 2013: Merry merry merry ChristmasÂ
