FYI | Aug 17 2016
By Peter Switzer, Switzer Super Report
This year has been an intriguing one with a lot of the old historical rules of thumb being tested out fully by the 2016 reality. Recall Warren Buffett has argued that “If past history was all there was to the game, the richest people would be librarians.” I think historians might have been a better choice of professions but who am I to argue with the Oracle of Omaha?
That said, note he did say “If past history was all there was to the game…”.
History clearly isn’t everything but it can still help you make decisions about, say, do you want to remain long stocks? Is it time to buy? Is it time to rotate into another sector? And so on.
I know Charlie Aitken and myself place a lot of importance on the historical observation of Sir John Templeton, who advised: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
We both know the Australian market is a long way from euphoria and so are the European and Chinese markets. Wall Street, however, is another beast and last Thursday it hit a trifecta, where the Dow, the S&P 500 and the Nasdaq all cracked all-time highs.
And the last time this happened in 1999, the aftermath was not great — the dotcom bust — and that’s what a lot of experts have pointed out.
However, that was a tech bust and the S&P 500 was not as badly affected as the Nasdaq index but it copped some terrible backwash.
Looking at the chart below shows how US stocks have rebounded since the GFC but if you draw a straight line from the starting point on this chart to the end-point, you see the tops are much more significant than the current one, which is my visual guide for euphoria or lack thereof in the current case. However, we are getting into my watch out for the irrational exuberance zone.
So, despite my warning of a few weeks ago that I was getting negative about a possible pullback, which I suspect is still likely, my overall view on stocks for the year remains positive and I like them better than dreary, low-paying term deposits.
Based on history, I should be wary about stocks because there is an old rule called the January Barometer, which says “as the S&P 500 goes in January, so goes the year.” Of course, January was a shocker this year but, like all rules of thumb, they don’t always work out but it especially doesn’t hold true in Presidential election years.
According to the Stocktraders Almanac, the last seven months of an election year are strong historically. With the past 16 elections since 1952, there were only two losing years. One of them was during the GFC of 2008 and August tends to be especially strong in an election year!
I’m even more comfortable knowing that the “sell in May and go away” rule has not worked out this year, with US stocks up over 4% since May, and our market is up over 5%. And furthermore, the old saying ends with “come back on St. Legers Day, which is mid-September, so this is helping my overall positivity for stocks.
Unsurprisingly, the Traders Almanac tells us that “sell in May” isn’t useful in an election year.
Those who believe the US market is moving into the third installment of the bull market see the Dow at 20,000 by year’s end as the next top, followed by 23,000 some time later! The first stop is about 7.6% away but the Yanks might find beating gravity harder than us, if our reporting season comes in OK and the US Fed raises interest rates sometime this year. This should help our dollar fall, stimulate economic growth and push up currency-sensitive stocks.
Now many of us might fear buying at the top but you do often find a stock market will make a lot of highs along the way to go higher. It can be a very positive omen, rather than I must sell and fear a correction.
The Nasdaq popped 26% when it made its first all-time high in 1999 before it lost 80%!
Professor Jeremy Stiegel from the University of Pennsylvania's Wharton School, told CNBC that he likes the earnings acceleration he’s seeing with US companies.
He has the S&P 500 heading toward 2,300 be year’s end, which is about a 6% gain and he’s been bull market calling since 2009 and I’ve been reporting him talking up stocks over that time.
One day he will be wrong but he’s no dope.
OK, these are the arguments for staying the course and believing in stocks for the rest of 2016 but what am I nervous about?
The Wealth-X Billionaires Census Survey of 2500 mega-richies says they are holding 22% of their wealth in cash. This mirrors the UBS survey of the 20% of wealthy Americans holding 20% of their portfolios in cash.
Generally, wealthy worriers are concerned about the US election and Donald Trump, the US stock market being at all-time highs, question marks over the Chinese economy and its banking system, and the EU post-Brexit, along with its Italian banking challenges.
But do these all represent the typical wall of worry that all stock markets climb as they go higher? I suspect so.
Certainly a lot of fund managers are holding a lot of cash on an historical basis but I wonder if they’re operating in an old world, when term deposits were 4-5%? Term deposits are now closer to 2% and worldwide official rates are zero to negative, so maybe this time is different.
I hate writing these words as they have come back to haunt predictors in the past, but who can argue with me, interest rates are different!
This is why I argue that we have to get over our infatuation with term deposits. Sure, it has been good if you’ve kept one or two years’ worth of income in term deposits to get you through two bad years of a stock market crash. But given that dividends don’t collapse to the same extent as stock market prices, even over a GFC-style collapse, it means if you have a good portfolio of stocks that pay historically consistent dividends, then maybe your reliance on term deposits can be peeled back until they become more normalized.
I know some smarties, who I respect, like to talk about capital preservation, but I think you have to become capital realistic. If you retired in 2009, your capital could have grown by close to 100% via capital gain and dividends minus what you have taken out. Yes, I know it might have fallen by 50% in 2008, if you were totally in stocks. Before then, however, it grew greatly between 2003 and 2007. Capital does that!
Over that time, you would’ve seen dividend growth as well but the goal needs to be creating a stream of income that is resilient over the cycle, even if your capital goes up and down.
I like the history that says stocks could go higher in an US election year. And I like the other good historical omens that tell me we’re not done with this bull market yet but history has also taught me not to be too cocky about stock markets and how crazy they can be.
History has also shown me something unforgettable that a great collection of top paying dividend stocks, often bought when everyone is selling, can make living with the vicissitudes of markets a lot easier than many think.
I think historians, if they plied their trade to stocks, could be like Warren Buffett, albeit in a mini-form.
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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