FYI | May 13 2015
By Peter Switzer, Switzer Super Report
I keep saying this, and people don’t believe me, but one day I will turn negative on stocks and I will tell everyone. When that time comes, and it’s not now, I won’t care if I am six months or even a year early, though I will try to avoid that mistake.
One thing I know is timing the market to perfection is impossible — no matter what some honkies tell you.
Correction versus a crash
Research that John Murray at Perennial Value used in creating his Wealth Defender Listed Investment Company (LIC) showed if you stay in a market and ride out the crashes and booms, your average annual return is 11%.  If you get out three months before – that’s close to perfect timing — your return is 16.2%. However, if you get out three months after the first leg down in a crash, the return is slightly higher at 16.5%.
The big lesson is to work out when a correction is bad enough to be a crash and get out. I can believe a correction will show up this year but right now, I can’t see the makings of a crash.
In terms of keeping the faith, the good old Yanks did the right thing on Friday with the Dow up 267 points on a pretty good job numbers that not only confirmed that the US economic recovery is still in train, but that the Fed doesn’t have to rush to raise rates because there were a total of 223,000 jobs created. If they were over 300,000, I think the market could have sold off in anticipation of an early rate rise.
But the best bit is the US recovery doubters have been seen off the property! And the stock market loved it, with four stocks up for every one falling and eight of the 10 S&P 500 sectors up by over 1%!
A return to rationality
That’s all and good but the really good news was that the bond market started to behave more rationally. Bond yields have been rising just when there was a lot of doubt about the US economic recovery. Normally, if an economy was weakening, you’d buy bonds, pushing bond prices up and yields down, but the reverse has been happening.
When a colleague asked what was going on with bonds, I said I didn’t know but I did guess that maybe the bond market believed in the recovery story. I was being facetious but the response of the bond market to a slightly slower improvement in the job market, with bond prices up and yields down, made more sense.
Just to clarify, if you think interest rates would rise soon, bond yields would rise too and vice versa. I think the bond market, which is said to be ‘smarter’ than the stock market, is also a hell of a lot more jumpier, nervous and conservative. I think the bond market is worried about all this money swashing around the world and therefore it’s jumping at shadows.
Fed speak and Europe
The most interesting line from last week came from the Fed boss, Janet Yellen, who said that market valuations were “quite high” which spooked the stock market but did throw in that “the Fed was not seeing the hallmarks of a bubble.” That tells me that Janet agrees with me that it’s not time to lose the faith in stocks but it means a correction is likely – probably when she raises rates for the first time – but I will then tell you that it is another buying opportunity, unless the economics changes elsewhere.
Where? Well, Europe needs to be monitored but I like what I see now. You would have to love this from Reuters: “For the first time in many years, it seems clear that the euro zone performed not only better, but far better than the US, which almost certainly suffered a mild economic contraction in January-March.”
Euro zone growth figures out this week are expected to come in near 0.5%, which could even mean it out-grows the UK, which has been the star performer of the EU. If the numbers come through, it could mean that the QE program of 60 billion euros a month was not needed but I see it as insurance, which should ensure that future growth could really surprise on the high side in 2016.
Huw Pill of Goldman Sachs explained the improvement, where even Italy is expected to have grown by 0.2%, based on five pluses: “This recovery is supported by five underlying drivers: (1) stronger external demand; (2) easier domestic financial conditions; (3) an end to fiscal austerity; (4) a weaker euro exchange rate; and (5) lower oil prices.”
This news is great for those who followed our tip that Europe was the place to invest and I suspect the snowball of confidence will really start to roll if the economic news comes out as positively as expected.
There’s no place like home
Meanwhile, those five factors outlined by Pill have a bit of relevance with us here in Australia.
Our dollar has fallen, though it needs to go lower, domestic financial conditions are easier, external demand is responding to a lower dollar, oil prices are down, helping retail sales as well as inflation, and Joe Hockey has made fiscal policy easier.
In a world where central banks are making fixed-interest investments unattractive, stocks are always going to be more popular. The big question mark over this monetary policy gamble was would economies respond? It looks like it has worked in the US and there are promising signs in the Euro zone, so let’s hope it can start delivering down under.
Note how no one in the Northern Hemisphere is talking about deficits and debt and they are really bad there, while ours are manageable. It’s time for growth and if the Budget stimulates growth and jobs, then confidence will follow and so will stock prices.
And that’s why I’m keeping the faith in stocks. When the economy fails to respond or if it over-responds and interest rates, as well as inflation, start to rise (which will mean we are heading towards normal economic conditions), that’s when I will start changing my pro-stocks tune.
Â
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.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information:Â 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.
