After writing the Switzer Report on Saturdays for over five years, I’ve realised that I’ve unearthed a very good indicator for determining your attitude towards either buying or selling stocks. And given its damn good predictive record since 2011/12, the current messages it’s giving out make me believe that the S&P/ASX 200 Index seeing 7000 this year is not as big a call as it sounds to others in the forecasting caper.
Unwittingly, to get a weekly handle on what the economic and market data was telling me, I created my “What I liked” and “What I didn’t like” lists for my Saturday version of this Report.
Often these have been compiled in the wee hours of Saturday morning before they’re sent to my proof-reader and IT person, who then sends the Report to you. It is genuinely a ‘hot off the press’ production!
Clearly, the point of this exercise was always to objectively test my optimism, which was rather unique amongst my peers in early 2009, but as the years have gone by, one by one the doubters have become believers in this unusual bull market. And in 2018, many have jumped on board with expectations of the Index beating 6500 being held by a majority.
Some are in the “we’ll beat the all-time high of 6828.10” this year and a smaller number are in the “7000 here we come” camp.
Based on my “Likes versus Dislikes” list, the number of positives way outweigh the negatives, as they have nearly every week for a long, long time.
In 2009/10, the “Likes versus Dislikes” numbers were a lot closer but since the global economy started to grow, with all of the big economies growing in sync, the positives have exploded and 2018 doesn’t look like it will bring any changes to that.
Interestingly, one of the smartest guys in any room anywhere — Ray Dalio of Bridgewater Associates — thinks the big challenges this year for stocks will be political, not economic.
He has a positive view on the US economy but he’s worried about other things. His team are building algorithms based on the political tone in newspaper and websites to try and get a handle on the big issues that might get in the way of a good US economy and improving profitable companies!
I’m gambling that the political issues will get solved and economics and profitability will remain the key determinants, even with the likes of Donald Trump, Kim Jong-un and separatists in places like Spain making people like Dalio a little nervous.
In fact, Ray, who recently wrote a book called Principles: Life & Work (which I’m reading right now and is worth reading for anyone running their own money) gives us all some good investing advice. “To be successful in the markets you have to be an independent thinker because the consensus is in the price, and if you’re betting against the consensus, there is a high probability that you are wrong,” he told The Financial Times. So the ability to have a group of independent thinkers, who’ll argue with each other, is critical, he says.
Of course, that’s what we always try to do in this Report and on my TV show.
My 7000-call this year puts me in a minority but I have good reasons to go out on a limb on this subject, so let me list them.
- Wall Street should not let us down as the market driver we play follow the leader with, with the current US reporting season expected to show earnings up 11.2%. And furthermore, the next reporting season is tipped to be even better. Meanwhile, the Trump tax cuts are bound to keep US companies more buoyant than they would’ve been if they never materialised.
- Our economic growth outlook seems set to beat 3% this year, as the Reserve Bank tips.
- At the start of 2017, we had three stress points — wages growth, business investment and consumer confidence. Business investment has been gaining strength since the middle of last year. Consumer confidence is sneaking into the positive and more and more local economic experts are backing better wages growth for 2018.
(Note the rising trend for consumer confidence)
- Even retail is showing some pretty positive signs, despite the Amazon black cloud overhead, with the latest sales numbers rising by 1.2% in November, after increasing by 0.5% in October – the strongest outcome in four and a half years!
The chart below shows another rising trend:
- The worldwide infrastructure boom has to be good for global growth and partly explains why commodity prices have continued to climb.
- Despite bond market troubles speculated upon, the reality is that the yield curve is not inverted and long-term rates on US bonds are rising. When the yield curve inverts, I’ll start sounding the alarm bell but even then, I’d expect at least a year before recession and crash talk would be necessary.
- The sector most expected to cop a comedown was building, but only last week we saw the total value of dwelling approvals rose by 14.8% to $7.7 billion in November – a new record high! Colleagues like Roger Montgomery have been afraid that a building collapse would undermine the economic and stock market recovery but this outcome should make Roger sleep easier at night.
- And then there’s the job market story, which has been a ripper! In November, employment rose for the 14th straight month, up by 61,600 in November after rising by 7,800 in October. Over the year, 383,300 were created and that’s the second fastest job creation showing ever! I reckon the better consumer and retail results are inextricably connected to this great jobs’ story.
- Even ‘our team’ in Canberra are starting to kick a few goals, with a couple of by-election wins and the MYEFO numbers revealing that Australia’s underlying cash deficit is now expected to stand at $23.6 billion for 2017/18, some $5.8 billion lower than the level forecast in May.
I could go on in this positive vein but I do know we need to see some better-than-expected news out of reporting season to convince market influencers that our improving economy is translating into better corporate profitability. As the retail numbers showed last week, this is a guessing game, with shortsighted analysts clearly getting wrong the calibre of companies such as JB Hi-Fi, which saw its stock price plumb as low as $21.61 in May but is now perched at $28.36!
Our miners had a similar story two years ago when BHP slumped to $15 and the analysts could not see its potential, which has now taken it to $31.53.
There are always scare factors for those playing the stock market, and that’s why we say stocks “climb the wall of worry”. But 2018 remains a good bet for the bulls out there.
Just about every economic and market sign is on a rising trend and, as I always argue: “The trend is your friend until it bends.”
And that’s my job — to watch for the bends.
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.