FYI | Apr 07 2016
By Peter Switzer, Switzer Super Report
So what’s going to turn around the current stock market sentiment that could make CMC Market’s Michael McCarthy end up being right, with his 5900 call for the S&P/ASX 200 index by year’s end?
Let’s list what “must happens” we have to see show up and then test to see if each one has a high or low probability of happening.
First, Wall Street has to set a positive lead as I can’t see our stock market rising while the US market is sliding. That said, I could see our market rising at a faster rate because the S&P 500 is only 60 points off its all-time high of 2130.82 back in July 2015.
Its pre-GFC high was 1549.38, so the market is now 33% higher than it was. And since the closing low on 3 March 2009 of 696.33, this market is up 197%! For us, our 6 March low was 3145.50 so our market is up only 60%. You can see why I say we are overdue for a catch up or, perish the thought, the Yanks might have to crash!
Second (and this might address the scary issue I alluded to in the sentence above), the US economy is doing enough to debunk the crash-urgers, who, since January this year, have been pedaling recession in the USA-talk. Friday’s 215,000 jobs and the better than expected ISM manufacturing data powered a near 200-point turnaround for the Dow Jones index and really helps us believe that the US economy is progressing, albeit at a pace that doesn’t please everyone. A good US economic recovery is very credible.
Third, China needs to do OK and better than what the doomsday merchants out there are saying about the world’s second biggest economy. Last week, the Chinese manufacturing purchasing managers index rose from 49 to a 9-month high of 50.2 in March. The PMI gauge for the services sector rose from 52.7 to 53.8. Any reading above 50 indicates expanding activity. Also, the private sector Caixin PMI for manufacturing rose from 48 to a 13-month high of 49.7 in March and above forecasts of 48.2.
This is what CommSec’s Craig James said of the data: “The improvements in both manufacturing and services sector activity levels in China are encouraging. China is Australia’s largest trading partner by a large margin. And China is attempting to rebalance activity away from construction, manufacturing and mining to service sectors like retailing, financial services, hotels and food services. So today’s data is encouraging, indicating that the transition remains on track.”
The strength of China is important to oil, iron ore and other commodity prices and could also help change negative views on the likes of our banks, which some think are too exposed to miners. These views are not right but perceptions are important and the world might have the wrong idea about our housing sector too and its threat to our banks. However, as I say, perception is everything.
China sticking it to its doubters would be good for commodity prices and our stock market. How likely is this? It’s no certainty but I think the Chinese Government is hell-bent to keep growth above 6.5%, so it’s possible.
Fourth, on the subject of oil prices, these need to stabilize and stay away from the $US25 a barrel level. Low oil prices are helping many economies and businesses but stocks are being slugged, especially in the US, where the S&P 500 has a lot of important companies where the bottom line is not helped by falling oil prices.
CNBC says Helima Croft, the global head of commodities strategy at RBC Capital Markets thinks oil heads up to $US50 a barrel from its current level of around $US38. She’s pinning her hopes on an agreement of some kind at the April 17 meeting of OPEC and non-OPEC oil producers.
"Their decision to come out and even mention a freeze was a catalyst for the rally that recently pulled crude to within view of $40, Croft said. “As we look towards the 17 April meeting, I don't think Saudi Arabia would even show up in Doha if there wasn't going to be an agreement," said Croft.
Other analysts think oil could fall back below $US30 but that could be the result of failure at the 17 April get together in Doha. Stocks are bound to head in the same direction as the oil price. I think an oil agreement of some kind that is good for prices must be a positive for all producers, so I’m punting on Croft’s call but it’s not a certainty of a Winx-kind. (That’s one for racing enthusiasts!)
By the way, if the three “must happens” above all show up, then I’d expect iron ore prices to sneak up too and that would be good for the S&P/ASX 200 index.
Fifth, the Oz dollar needs to sink back towards 70-72 US cents, which would mean the US greenback would be higher but the Yanks have to get used to normalcy, where a good economy has a stronger currency as interest rates rise. A lower local dollar will support economic growth, employment and company profits, which should help stocks head up.
This is one that might be hard to pull off, as the US stock market seems immaturely scared of rising interest rates and a stronger dollar.
Sixth, Europe needs to keep on the economic comeback trail. Economist.com only two days ago had this to say about the Eurozone: “For the first time in years, however, the euro zone’s economy is not foremost among the worries. It grew in 2015, for a second consecutive year; unemployment rates around the periphery are falling; and “Grexit” has again been averted.” But it added: “Yet some caution is in order.”
It faces challenges from ‘Brexit’, the Syrian refugee influx and then there’s terrorism. Britain’s exit from the EU would not be good for the UK, nor the Eurozone and like the Grexit of last year, the speculation is not good for confidence. However, the refugee and terror threats will force fiscal spending, which could actually help economic growth. Undoubtedly, the euro has to remain competitive and according to the Economist: “Take away the growth, of nearly a percentage point, attributable to trade, and Europe’s nominal GDP rose by just 2% last year.” I am quite bullish on Europe so I think they could be a plus for 5900.
Seventh, I’d like to throw in a better than expected Japanese recovery but they really have growth problems there. These are structurally-linked to their failure to embrace the kinds of microeconomic reforms we endured under Treasurers Paul Keating and Peter Costello. These changes, along with some good luck from the mining boom, explain why we have grown for 25 years without a recession. If Japan does well, which I have some doubts about, it would be a bonus.
Eighth, a US election result that does not spook everybody, which clearly means Donald Trump can’t win! This guy is crazy and today’s headline proves the point, with Reuters trumpeting: “Trump predicts ‘very massive’ recession in US!”
Economists don’t agree. "Nobody can predict what the stock market is going to do," Rajeen Dhawan, director of Economic Forecasting Center at Georgia State University, said. "I cannot predict a stock market crash, so I cannot predict a recession. I don't see any of the reasons for a recession going forward unless there is a huge problem with the market or there is some catastrophic world event which is beyond the scope of economics." (Reuters)
The Democrats are screaming that Trump’s comments “undermine the economy” and they are right. The US and world economy don’t need Trump and neither does our stock market. I reckon Trump will be trumped by good sense but I wouldn’t put too much money on it.
If the above “must happens” happen, then we are a good chance to see 5900 this year on our S&P/ASX 200 index. Also, it’s worthwhile to point out that US presidential election years have been historically good for stocks.
Of course, we are in a slow, grinding higher economy — here and globally — so we might have to wait until 2017 to see Macca’s big call but I’m fairly confident that we will head in this right direction if a lot of my “must happens” materialise. As you can see, they are not ‘pie in the sky’ — they are possible and pretty probable.
I’ll be monitoring all these, so watch this space.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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