FYI | Oct 05 2012
By Peter Switzer, Switzer Super Report
I expected a nice result for stocks last quarter based on the European Central Bank (ECB) pulling off a big play – it delivered!
My prediction was also based on an expectation that the QE3 stimulus package in the United States would come if needed, and Ben Bernanke came through with the end-result being that the Dow put on 4.32% for the quarter, while the S&P 500 added 5.76%. And locally the S&P/ASX200 index was up around 6%.
So what should we be watching for the best quarter of all?
What to expect
Firstly, the technical data says a stock market pull-back is likely and it could be sparked by a dumb decision in a place like Spain. The Government there isn’t asking for a bailout because it’s scared about how the populace would react to the austerity measures that would come with ECB help.
This help would be in the form of the ECB buying Spanish bonds to drive down the interest rates Spain pays when borrowing. At the moment, rates have come down on the assumption the Spaniards will request a bailout, so if they welsh on the deal, then the markets could punish them; this would hurt stocks and we would cop the backlash.
Next, China is the big fly in the ointment and its sluggishness is surprising many with growth expectations recently reduced from a number with eight in it to one with a seven. That growth number may look high by Western standards, but the pullback feels painful for the Chinese and their business partners who have been used to much faster growth. This is why our export prices have slumped and why our trade deficit for August grew to just over $2 billion. The July one was also revised up from about $500 million to $1.5 billion!
I’m closely watching the new leadership change in China, expected this month, and I hope we some positive steps to pump up China’s growth. I will be watching the Shanghai Composite index to see how local Chinese are playing stocks in coming weeks. This index has been slumping for months and I need to see an overdue turnaround.
US data on the mend
Of course, I’m also watching the USA and I have liked the overall run of economic data coming out of there with the housing sector – which was at the core of the subprime crisis and GFC crash – looking more healthy month by month.
This week, we saw better US manufacturing data and overnight the ISM reading for the services sector was much better than expected at 55.1, where any result over 50 means expansion for this important employment sector.
Also in the States, the ADP private sector employment report came in better than expected, so Friday’s jobs report is bound to be huge for the market. Regrettably, the ADP survey has not been a great guide for the official jobs report, but I live in hope given the signs of general economic improvement showing in the States.
The next big watch issue is the upcoming reporting season in the USA, which is not expected to be flash. There have been predictions that the soft local and global economy would eventually hit the bottom line of US companies, but to date, this hasn’t materialized.
The bottom line
I reckon this last point is the most vulnerable one because these results are for the quarter before the bullish Christmas one and in the March quarter, the impact of the ECB’s monetary stimulation and QE3 is likely to be taking effect.
Of course, that quarter will have to deal with the ‘fiscal cliff’ issue, but I can’t believe that US Congress will vote, via pigheaded politicising, for a recession!
I think October will bring a pullback in stock prices, but I can’t see it being deep. It will be a buying opportunity and it could last into November because of the US election and the the fiscal cliff debates in Congress.
However, I suspect we will see better economic data in the USA, China and Europe by December and that will produce a nice return for those who snapped up great companies that pay nice dividends at lower prices.
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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