FYI | Sep 23 2015
By Peter Switzer, Switzer Super Report
It’s around 14 weeks until the end of this year and history said 2015 was supposed to be a good year for stocks, however, we started at 5411 on the S&P/ASX 200 index and we’re now at 5140, so we’re down 5%! But it wasn’t always bad news, as on March 3, we were up 10.8%! So what happened and is there likely to be a turnaround before we start popping champagne on New Year’s Eve?
And given the Fed’s decision not to raise interest rates in September, does this help or harm the chances of stocks going up over the next two and a half months?
From my point of view, I was hoping the US central bank would raise its official interest rate, stocks would sell off for a short time, then value chasers would return to the market and long-term investors would focus on a US economy heading up. Wall Street would head up, we would follow suit and the usual December stock market rebound — the so-called Santa Claus rally — for us would kick in, and that often rolls into January and February.
What does the Fed interest rate delay mean?
There are those who say stocks should have gone up but US stock market indexes fell the day after the Fed’s decision with the Dow Jones index down 290 points (or 1.74%) to 16,384.58. Given 18,351.36 was the all-time high, then the world’s most watched market is in correction territory again, off 10.7%.
I remain in dip-buying mode and hope to get my pay-off before Christmas, but if this Fed delay means it happens early in 2016, then so be it. I believe in the post-rate rise process but its start date relies on Janet Yellen and her central bank buddies.
The delay also puts focus on how worried the Fed is about China and its impact on the global economy. I have to confess I am sweating on one or two things happening to help stocks. First, Beijing comes up with a stimulus package that really wows stock market players. Second, the previous stimuli kicks in and we start seeing some better Chinese economic data as we head towards year-end. Of course, if this doesn’t show until 2016, then it could mean stocks will be volatile in a zone around 5000-5200 for the S&P/ASX 200 index, but so be it.
But a breakout to the high side will come. The numbers experts think fair value is at least 5400 or higher and both of my TV charts guys — Lance Lai and Gary Stone —say their technical analysis is positive for stocks down the track.
More Fed points
What else can I say following the Fed decision? Try these observations:
• CNBC’s Jim Cramer expected a 500-point fall if rates had gone up but I don’t agree with the magnitude of the drop, though it would create a great buying opportunity for sure. That said, no rate rise, provided it’s not seen as a reason to doubt the US recovery, should help stock prices in coming months.
• If the Fed raises in December and when, say China data improves and/or a new stimulus package comes, then we could see a triple bunger reason for stocks to spike in December! This is my big hope for a Christmas present for all of us in the wealth-building game via stocks.
• The avoidance of a rate rise could make people believe that a recession could be in store. There are those who think China could cause it and while I think the next global recession is a way off, the reluctance shown by the Fed could fuel the fire of those doomsday merchants who have been wrong since 2009. For history buffs, in the US, a recession has come as early as 11 months after the first rate rise and as long as 86 months later.
• Against this negativity, you can’t be serious in thinking the first interest rate rise from virtually zero will end the bull market, so it is only logical that stocks still have a way to go upwards, unless a huge curve ball event completely turns around confidence.
• Anyone trying to justify Janet Yellen’s decision could point to low inflation, low wages growth and a much stronger greenback over the past year, which is really like an interest rate rise. So as long as the US economy keeps showing good growth, the whole waiting for an interest rate rise anxiety might be unnecessary.
• In case you missed it, 13 out of the 17 Fed members have been surveyed and they expect a rate rise before 2016.
Conclusion?
We’re in the hands of China and the global economy. I expect the up and down volatility we have been seeing recently to continue until some big news — hopefully positive — comes along to get the Fed to move. This will open up the probability that stocks will have a nice run up but until then, we’re like Janet Yellen and we’ll just have to play the waiting game.
For me, I am going to buy stocks that pay nice dividends every time the market wants to go excessively negative because I am still a strong believer in the long game.
If you want some ideas, Simon Conn of Investors Mutual likes three smaller cap companies that pay good dividends — Steadfast, Shopping Centres Australia and Pact Group Holdings. These are the sorts of companies I am looking for — smaller cap companies, with good outlooks and a solid history of paying nice dividends.
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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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