FYI | Jan 22 2014
By Peter Switzer, Switzer Super Report
Take this number down – 1,848.36. It’s the starting point for the S&P 500 on January 1, 2014 and it will be used to measure a pretty reliable indicator for what might happen to stocks this year. It’s called the January Effect and it says however January goes, so goes the market for the year.
How low can it go?
On Saturday the key US stock market index ended at 1,838.7 and so we need to see a run of good news – both economic and earnings – to tick the box called the January Effect. That’s the story for the USA but here, for a good year on the local stock market, we need to see the Aussie dollar continue its slide, even though it is gritting to see, even the Kiwi dollar, gain ground on our once mighty, above-parity-with-the-greenback dollar!
In 2011 we got 1.3791 Kiwi dollars to the Aussie, but now it’s more like 1.0550 and some expect to see parity this year!
It all sounds bad, but it really means Aussie businesses that benefit from a lower dollar will be in the box seat for higher profits, and share prices will follow. Noosa looks more attractive on price than Queenstown for tourists, and that’s the pay-off from the sinking currency.
The Yanks have built their comeback on a low greenback and it has been a “beggar thy neighbour” policy – and we’ve been the neighbour!
On Saturday morning our dollar was down to US87.7c, and there’s a certain guy from the RBA who lives in the Shire in Sydney, who would have been cheering. Glenn Stevens has been wishing for a US85c Aussie dollar because he does not want to cut interest rates anymore in case it turns a housing recovery into a bubble — which it is not in anyway at the moment, by the way.
Stevens knows a lower dollar will push up economic growth and create jobs, but that’s not all, it will boost profits as well as share prices. He might not care primarily about share prices, but he knows rising share prices will build the snowball of confidence needed to kick-start the Aussie economic recovery.
A helping hand
But it’s not just a local story — the Yanks and the Chinese have to play their part.
China needs to keep growing at 7% or so and while the World Bank fingers China as the biggest risk to world economic growth, which they say is improving, the World Bank’s economists still think the world’s second biggest economy will grow at around 7.7%. So, I will park my China concerns for the moment to concentrate on what the USA has to deliver over the next two weeks.
It’s simple – earnings and economic good news.
December Jobs data aside, US economic releases have been good enough for the Federal Reserve to start tapering its QE3 monetary stimulation. However, there are still some small question marks over the strength of the economy’s comeback. That accepted, the Fed’s vote to taper was 11-1 and that says a lot about the perceived strength of the economy.
On the jobs number – where 74,000 jobs showed up instead of 200,000 – Jan Hatzius, the chief economist at Goldman Sachs, said 50,000 jobs were lost because of the bitterly cold weather in the States. So, as I argued last week, that jobs number was dodgy.
So, what about US earnings? Some 52 companies in the S&P 500 index have reported and Thomson Reuters says earnings per share is up solidly but the revenue increases have not been impressive.
And that revenue result, along with outlook statements from the bellwether companies, could be a massive determinant of whether or not we get the January Effect we would love to see. At the moment only the Nasdaq is up in 2014.
Some good earnings news
On the plus side, 50% of the companies that have already reported have beaten earnings expectations, and only 36.5% disappointed. That said, US market history shows some 60% of companies impress to the high side when it comes to earnings. So, the pressure is on.
Of course, the statisticians amongst you know a sample size of only 52 companies is not believable, but by week’s end the picture might be substantially clearer. I feel certain the run of earnings and economics data will be critical for what happens to stocks over the next two weeks. The experts think earnings will be up 7% and if that doesn’t happen we could see a sell-off or vice versa.
Another market issue could come out of the World Economic Forum in Davos, Switzerland, which starts on Tuesday, but I can’t see anything there topping the economics and earnings show in the USA.
In conclusion, if the Yanks do report well on the economy and on the corporate front, then the US dollar will sneak up with stocks and the Aussie dollar will keep sinking. This will underpin improving profits in Australian companies and we would have a GREAT year on the stock market. Without these nice little dollar ducks all in a row, we could only end up with a good year for market-players.
Call me selfish but I want a great year and the more the dollar dives, the more I will invest.
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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