FYI | Sep 25 2013
By Peter Switzer, Switzer Super Report
With the Dow Jones index now in record high territory and the All Ordinaries Accumulation Index also at levels never seen before, the key question for many is – how long does this bull market run for?
Let’s face it, if we thought it was, say for only one year, then the more nervous amongst us might say: “That’s enough for me and so I’m heading for the sidelines to hide in term deposits until the crash comes.”
This timing the market strategy is really difficult to pull off accurately and a market can keep on rising for a long time after it should rationally head south.
What the experts say
I asked George Boubouras of Equity Trustees and our own Paul Rickard, who was the founding CEO and then chairman of CommSec – so he has seen plenty of bull markets – how long this one has to run?
George, who is not a thrill-seeker type, instantly replied “three years” and Paul opted for two years. Now you have to know that Paul is a more cautious ex-banker but he was a Hall of Fame stockbroker as well, so he can chance his arm occasionally.
The likes of Geoff Wilson, of Wilson Asset Management, who is arguably one of our best fund managers, is more in the three-year camp and Bell Potter’s Charlie Aitken is even more bullish.
So, even if we took the more cautious Rickard analysis, then we should at least look forward to 2014 as a good year for stocks. I have pinned my colours to the mast on a better economic year for Australia and I think China, Europe, the USA and Japan will all get better, which will drive up world economic growth.
As an economist, I can be biased about the importance of the economy, but it is critically important to what stocks do, especially now. Take the USA, where the market P/E has gone from 17 to 20 over 2013. When a P/E hits 20, it implies a return of 5% on stocks. That is, 20 divided into 100 equals 5%.
Now if interest rates were normal, when a stock market gets to a P/E of 20, then interest rates on term deposits or government bonds could be 5% as well and so investors ask: Why should I risk being in shares for a 5% return when I can get a safe 5% with a government bond or a term deposit?’
Gradually market investors slip out of the stock market, especially as inflation, economic growth and employment are rising in a boom environment. This exodus eventually turns into a stampede for the stock market exit doors and we’re into crash territory!
The new normal
All of this describes normal pre-conditions before a crash, but we’re not living in normal times. We have dodged a Great Depression bullet and stimulatory monetary policy has been used to pump up the US economy first, and now belatedly it is being tried in Europe and Japan.
The economic results have not come through loud and strong yet, but stock market players have got ahead of themselves, as they always do, assuming the economy and company profits will justify their investments. They need the economies of the world to pick up so the ‘E’ bit (i.e. ‘earnings’) of a P/E can get bigger, which pushes the P/E down and then gives more lifetime to this bull market.
This is a pretty big week in the USA for economic data with reads on the US housing sector, consumer confidence, durable goods, economic growth and personal income.
Angela Merkel has won another term in Germany, which should be good for European confidence, despite her austere ways.
That said, I would not be surprised to see a sell-off with Wall Street in record territory because there are some scary unknowns out there such as tapering, a Congress battle over the US Budget, future US jobs reports, etc. But I also believe improving economies in the USA, China, Europe and Japan will keep stock markets in bull market territory.
Until further notice or until I see data that changes my mind, we’re in dip-buying mode when stocks give into gravity. This is a sound strategy in a bull market.
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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