FYI | Sep 01 2016
By Peter Switzer, Switzer Super Report
Earnings season is pretty well over and the market’s response was pretty good, but the most important conclusion I’ve seen is the outlook for profits going forward.
“Overall profits are on track to return to growth in 2016-17 as the slump in resources profits reverses and non-resource stocks see growth,” AMP’s Shane Oliver explained. “2016-17 earnings growth is expected to be around 8%, with mining companies now seeing the fastest rate of upgrades.”
Given that our big miners are important for overall index and combined with the big banks and Telstra make up about 50% on the S&P/ASX 200 index, it makes me feel positive about stocks. It also adds a bit more credibility to my call that it could be a decent contrarian play to support our top 20 stocks again, which have been languishing over the past two years.
When I suggested this idea a few months ago to some of my experts they pointed to Woolworths, BHP and Rio being likely laggards but we’ve seen the world change for this lot in recent times, haven’t we?
But what about the banks? Well, I can’t see them shooting the lights out but I do think rising interest rates in the US will help banks’ share prices there and that can be positive for our banks as well. You often see telcos up on Wall Street and they then rise here. So too with financials.
And if you think the Oz economy is likely to remain in a reasonable growth pattern, as the Reserve Bank does, given recent revelations, then banks could do OK. Note I said OK, nothing flash, but definitely not the disaster some experts have been tipping.
Not surprisingly, this speculation comes with a split opinion on what’s next for stocks. And last week, while in Melbourne, I heard about some very negative analysis from one investment bank, which was tipping 10 years of recession! It came as I heard Treasury murmurings about 10 years of low interest rates!
What’s the deal with 10 years anyway? By the way, Treasury and this investment bank don’t get anywhere near my top 10 forecasters. In fact, based on history, they don’t even make my list. And let me be frank in admitting that my pretty good economic forecasting rests on my ability to pick out the economists who actually are good at forecasting!
Recently, I noted some views of Citigroup’s Chief U.S. Equity Strategist, Tobias Levkovich, around whether we should or should not chase stocks from here.
This is what Bloomberg reported: “On this subject Levkovich cites a relative measure of market sentiment to make his case: he notes that the normalized earnings-yield gap suggests that stocks are likely to rise over the next three, six, and 12 months.”
The earning-yield gap was defined as the 5-year future yield of the 10-year Treasury, minus the S&P 500's earnings yield, using operating earnings per share. Yep, it’s a little complicated but it’s not bad measure for prediction purposes and I liked his conclusion.
That said, a couple of things worry me about stocks now and that’s the all time highs of the US stock markets — the Dow Jones, the S&P 500 and the Nasdaq — and September has been a bad month for stocks on an historical basis.
"Nothing appears to be that much out of line but stocks may have run a bit too quickly of late, in our opinion," concluded Levkovich. "Investors need to remember that September is often a cruel month for stocks."
The Trader’s Almanac agrees with the spookiness of September but in an election year, such as this one, there is a pattern that says this month’s madness is less noticeable.
I think we can go higher over the next 12 months but going higher from here will be a function of how good the data is and the Yanks have a big week ahead culminating in the jobs report on Friday.
Apart from the US election, economic data and what it means for the Fed and its next interest rate rise will be huge for stocks. The next rate rise could hurt stocks but it will be a buying opportunity as eventually there will be a conclusion that the US economy is stronger and that’s why rates are rising.
The scarier proposition would be if economic data gets worse and no rate rises happen this year. That’s when I would have to take more seriously talk about 10 years of recession, which I don’t want to in the future and I don’t take seriously right now.
This won't surprise you but I think, at least for some time into 2017, that I am, like Tobias Levkovich, comfortable with stocks.
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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