FYI | Nov 19 2014
By Peter Switzer, Switzer Super Report
We have a bit over five weeks before the Christmas week is upon us and the question is: will we see a Santa Claus rally that will take stocks nicely higher?
There are those who say our rebound from the recent sell off was so solid, especially in the US, we might have already had our festive cheers and didn’t even realise it!
I don’t think so and while I think my 6000 call will have to wait for next year – and I hate backing down, I can assure you – I do think we will head up to a better S&P/ASX 200 index level by the time we think about popping the first bottle of bubbly on New Year’s Eve.
Let’s run through my five financial facts for a festive finish. Here goes:
1. The Yanks will set a positive example and the Wall Street lead-in will help our market beat this recent tendency to create a new resistance level that is sustained for far too long.
You can see we had trouble with 5400 and now it’s 5600 and we won’t beat this new cap without the Yanks’ help. On Saturday http://www.switzersuperreport.com.au/2014/switzer-saturday-56/ I looked at the breakout from the ‘megaphone pattern’, which is a plus, and this week’s US economic data should add or take weight from my argument. We’ll see industrial production, housing sector data, inflation, the leading index, the flash manufacturing read and the Fed’s thinking will be shown in the FOMC minutes.
2. The fact that there is a significant fall in oil prices has to be seen as a positive for not just business costs, but ultimately profits, of so many listed companies. And remember, share prices reflect expected earnings and the kind of macroeconomic environment that lies ahead. I think this cost reduction right around the world, not only changes the power balance for the likes of Middle-East countries and Russia, it actually could be a fillip for the struggling economic region called Europe. And lower petrol prices have to encourage consumers as well, with two-thirds of US economic growth down to consumption.
3. The success of the US economic recovery is leading to a stronger greenback and it means that areas like Europe will also benefit from a lower euro.
Since May, the euro has been sliding and where Americans paid $US1.38 for a euro, they now only have to pay $US1.24. That 10% depreciation will help Europe and it invokes memories of Paul Keating’s once infamous J-curve analysis. In case you have forgotten, the theory says when a currency falls there will be a period where the trade balance gets worse but eventually the trade balance picks up and creates a nice J-curve effect. This lies ahead for Europe in 2015 and the stock market could easily move ahead of the pay-off in the real economy, as it nearly always does.
4. Good stuff is happening from the China Free Trade Deal to the G20 promises. The Prime Minister summed up the G20 get together this way: "We have signed off on a peer-reviewed growth package that, if implemented, will achieve a 2.1% increase in global growth over the next five years, on top of business as usual."
And he added: “The Brisbane action plan contains over 800 separate reform measures, and, if we do all that we have committed to doing, the IMF and the OECD tell us that our… gross domestic product will be 2.1% higher."
5. Despite the negativity that abounds in the media, I think there is evidence that the Oz economy is turning around. Want proof? Well have a look at the NAB reading in business conditions for October, which showed that the index rose from +1 points to +13 points – the highest reading in six and a half years. And better still, it was the biggest lift in business conditions in 16 years! We’re talking April 1998.
Job ads have also been trending up for 12 straight months and even petrol prices here have dropped over 8 cents a litre in just over two weeks. Good stuff is happening and it will creep up on us and show up in better overall economic data in 2015 but I’m hoping our stock market buys it before New Year. That’s what I want for Christmas.
So that’s the facts that might help create a festive finish to the year but we might need assistance from Europe, where GDP data over the weekend showed the German economy grew by 0.1% in the September quarter with France up 0.3%, while even Greece is now out of a six-year recession. We need Putin to fix the Ukraine problem but his exit from Australia’s G20 meeting early doesn’t look great. We also need the European Central Bank to implement a policy initiative, that quite shocks the stock market and this could really bring in the Christmas cheer!
That’s my shopping list for stocks and I hope someone, more influential than Santa, can deliver it!
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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