FYI | Sep 27 2010
(This story was originally published on Wednesday, 22nd of September, 2010. It has now been republished to make it available to non-paying members at FNArena and to readers elsewhere).
By Rudi Filapek-Vandyck, Editor FNArena
It's very hard to escape it these days: there's going to be a big rally into the final months of the calendar year. At least, that is the impression one gets from reading through the many projections and market forecasts that are being published around the world.
Once upon a time someone said the share market is all about “fear” and “greed” and everybody went along with it. I disagree. I haven't seen much of any of these terms in the markets these past years. What I do see is “hope” and “despair”.
This is why the share market might just put in the predicted big rally in the fourth quarter this year. It's all about “hope”.
Now that Bernanke has made it repeatedly clear the Federal Reserve is ready to call in emergency measures in case things worsen again, and the negative trend in economic data seems to have stabilised, the groundwork has effectively been laid for another outburst of “hope”.
But when?
One of the disconcerting characteristics that has continued plaguing equity markets this year is the persistent outflows from retail funds. This goes a long way to explaining the pathetic volumes on which share markets in the US, as well as in Australia, chug along these days.
According to research conducted in-house at Goldman Sachs, negative fund flows usually go hand in hand with negative returns. Only this year, so far the US market is actually sitting on minor gains, and that is not including the above mentioned big rally.
So who can explain why the share market is not deep in the red as it should be, on historical references? There's one rumour going around the Federal Reserve is lending funds to primary dealers in the US, to “prop up” the share market.
Fact is, net funds outflows have continued haunting US share markets and there are estimates flying around that hedge funds are being hit, and hit hard, as well.
Take a look at the following graph:
Since late 2009 it has all been going downhill with retail funds in the US. Of course, this doesn't mean the trend cannot turn around. In the end, all trends are broken at some point. Just look at the negative trend in US data that almost miraculously, and very unexpectedly so, came to an abrupt end in August.
So far, however, net outflows remain the order of the day.
At least, as long as we're talking developed markets. The situation, and no doubt outlook as well, for emerging markets is quite the opposite. Analysts at Citi have done some analysis on the matter and their work indicates that net funds outflows is something that is plaguing developed markets, like the US, but it's a non-issue in emerging markets of Brazil, Turkey and China, to name but three.
Moreover, these developing markets have only started to develop pension systems and to make equity ownership a major feature of their retiring population. It's going to take many years before these countries ever reach the point where pension funds are right now in the UK and in the US, but Citi analysis suggests we have yet to see the big boost from this development supporting equity markets in emerging countries.
One more reason to be bullish on emerging market equities over the decades ahead.
Regardless of whether the downtrend in US data has now been broken, it is good to keep a clear perspective on what is actually happening in the US. The following comparison, thanks to Dave Rosenberg at Glushkin Sheff, illustrates perfectly why so many experts remain convinced 2011 won't be another booming year for the US economy:
One look at that graphic comparison immediately explains the laughter with which many experts have welcomed this week's declaration by NBER that the US recession ended in June 2009 (15 months ago). The share market did put in a big rally on the news though, at least in the US.
Following on from Rosenberg's graph, there is some more “good” news from the US Consumer Metrics Institute in that its own surveys indicate discretionary online purchases in the US have stopped falling.
That's the good news. Now to put that good news into perspective, here's how the current downturn (in discretionary spending) compares with the contraction of 2008. More proof there's no room for miracles around the corner?
So why is it, I hear you asking out loud, that so many people are banking on that rally in the coming months?
If my observation is correct, the reason that is mentioned most often these days is because of the “Presidential Cycle” in the US. And once you start googling the subject, you'll find there's a lot of research and commentary out there, and it's all positive.
In essence, what it amounts to is that the third year in the Presidential term, the year of Congressional mid-term elections, usually delivers the share market with a big kick upwards from November onwards.
Let's forget the reasons why, here are the facts (as put together by other experts elsewhere):
According to Birinyi Associates, the S&P500 has risen on average by 2.35% in the two months prior to the mid-term elections (data going back to 1962), plus in the three months after the gains average 7.46%. This implies a big rally ahead.
Alas, history also suggests the biggest gains usually occur when these mid-term elections do not result in a change of Congressional control, but that's exactly what is likely to happen this year. This is why Wall Street is hoping that a swing towards the Republicans might do it this year.
According to research conducted by Deutsche Bank's US strategist Binky Chadha, however, the main fact to watch is that mid-term elections have brought gains upon US equities in 18 out of the last 19 times.
He also found that gains are strongest when a Democratic President is faced with a Congres controlled by Republicans. Average annual gains under such a scenario, calculated Chadha, are 14.6%.
At Yardeni Research, analysts went a few steps further and started their analysis in 1891. Since then, history shows, the US share market has risen in 24 out of a total 29 third calendar years of the Presidential cycle.
The third year often tends to be the best one, reports Yardeni. All third years have been positive years since 1955.
What is seldom mentioned however, is that the US share market also often corrects in October prior to the elections. That still remains a possible scenario, even if the market would rally after the elections.
P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.
Rudi On Tour 2010 – You Are All Invited!
Your editor will be roaming the country in the coming weeks to give presentations to investors about his latest views on financial markets and about how to better use the info, data and tools on the FNArena website.
These presentations offer the unique opportunity to catch up with your editor in person and to ask questions directly.
Investors should note not all of these events are free, and they are all organised by one of FNArena's commercial partners.
The first series of presentations will occur on invitation from MINC Trading, with your editor contributing personally to opening day sessions of multiple day seminars on the Gold Coast, in Brisbane, in Sydney, Melbourne, and Perth.
Your editor will also provide the closing presentation on the "BULLS VS BEARS" one-day seminar organised by the Australian Investors Association (AIA) on Friday, 12 November at the Tattersalls Club, 181 Elizabeth Street, Sydney. (Other speakers include Steve Keen, Robert Vagg and Shane Oliver).
Finally, your editor will fill 100 minutes presenting and answering questions about the theme "The Market Always Knows Best, Or Does It?" to members of the Australian Technical Analysis Association (ATAA) on Monday, 15 November, also in Sydney.
While the AIA and ATAA presentations are for members, access to both events is possible after paying fees to the organisers.
The schedule for the four day seminars organised by MINC Trading is as follows:
Day One – Taking the fear out of the Stock Market
Day Two – Introduction to Options as a Trading and Investment Tool
Day Three – Trading Strategies to Profit from an Uncertain or Trending Market
Day Four – Long Term, Low Risk Income Generation Strategies
The current roster is as follows:
Gold Coast – 27-30 Sept
Sydney – 4-7 Oct
Perth – 11-14 Oct
Melbourne – TBA Oct
Brisbane – 18-21 Oct
Important: your editor will only present during the first day's session. All sessions start at 7pm. Fees to attend are $40 for one day, $100 for all four days.
To express your interest: send an email to info@fnarena.com
