FYI | Dec 03 2014
By Peter Switzer, Switzer Super Report
It’s the first week in December and I’m writing this piece from New York and tomorrow I will be standing on the floor of the New York Stock Exchange — the pumping heart of the world’s equity markets — and my goal here for the week is to determine what happens to stocks next year.
I will be interviewing some of the people who have I been watching on US business TV for nearly a decade and all of them helped me form my opinion in late 2008 that the stock market was bound to rebound in 2009. It did in early March — the 6th to be exact – of that year, taking the S&P/ASX 200 index from 3,145 — the lowest close of the GFC — to finish at 4,870 by December 31.
In those nine months our stock market went up 54.8% and that’s ignoring dividends! That’s the pay-off from listening to the right people and while they won’t always be right, I do prefer experts with a good track record to be my guides, in everything I do. Funny that.
Same, same but different
From where I sit now, I expect stocks to go higher next year and while the Yanks will lead the way, because they are in record high territory, I suspect they will rise in a more measured way, unless really surprising economic and company profit data shows up. And it could! I won’t rule that out either as this economy and this country is enormously resilient.
The analyses of Black Friday sales suggest crowds were down but sales were probably at all-time highs, like the US stock market. However, it looks like there was a 20.6% jump in online sales on the day after Thanksgiving when retailers get out of the red and go into the black.
Importantly, the word is the Fed, despite the good economic and market stories from the US, won’t be rushing to raise interest rates and that’s despite some smart economists thinking a rate rise could be as early as March next year.
I think this event will be crucial for our stock market. Why? Well it works this way. When the Yanks raise interest rates there will be no doubts over the strength of the economic recovery there. It has to be or else the rate rise, which could temporarily hurt the stock market, has to also cope with a rising greenback. This is one reason why the Fed is likely to delay the first rate rise.
Also with Europe weak and not likely to pick up economic pace until this time next year — if the region gets lucky — then the US has to be the crucial powerhouse for the global economy.
China is stimulating and so will Japan next year but Europe has a troublesome Eurozone constitution and so economies such as those of Greece, Italy, Spain and France, which need a lower euro to pump up growth, are stuck in the slow lane.
Right now Mario Draghi is trying to get a European version of Ben Bernanke’s QE program happening, but the Germans are worried that it will cause inflation, rocket up debt and cause more problems than it will solve.
They are wrong! You see the Poms were lucky to be on the pound and this largely helped its economy turn around via a depreciation of the currency. Unfortunately, Europe looks like it’s set to suffer what some economists call ‘Japanification’
Japan has had decades of stagnation because its policies were counterproductive and that’s what Europe is encountering and it requires Draghi to win over the Germans. I expect it will happen next year and this will help stocks head higher.
Back home
For our stock market the eventual rise in US rates and the greenback will take our dollar down, and while there could be a temporary stock market fall, as foreigners reposition their exposures, the depreciation will help our exporters, import-competing businesses and then stocks.
A recent economic outlook report by LPL Financial, here in the USA, tips economic growth over 3%, which is exactly what the Fed wants. But the analysis says not all the important economic indicators are “normal” yet and as inflation is set to remain low, thanks in part to lower oil prices, the central bank has no need to put the economy under any premature pressure by raising rates too soon.
Personally, I think if the ECB can beat up on the Germans and Draghi gets his way, the snowball of confidence would roll not only through economic forecasts for Europe and the world economy, it would also pump up global stock markets.
This in turn would force the Fed to raise rates and then take our dollar down creating the best of circumstances for our stock market.
Will it or won’t it?
Will this happen? It could and so my big watch is Europe. If they get this right we will see our market take out the 6000-level I hoped for this year and even go higher!
Without doubt, the 6000-mark lies out there waiting to happen but it was derailed by the big freeze in the US, which has delayed America’s economic recovery, the silly and too early sales tax hike in Japan, the slowdown in China and the stupidity going on in Europe with the Germans refusing to rescue the Club Med economies.
A part of our economy’s problem is that both Wayne Swan and Joe Hockey tried too hard for a Budget Surplus too early, which hurt the economy.
If Europe gets it right sooner, rather than later, then stocks will be off to the races and we should see some nice dividends here.
My greatest fear is that Europe dillydallies and this could create a re-run of 2014 in 2015 and that would be incredibly annoying.
If my greatest fear doesn’t happen, then a simple ETF for the S&P/ASX 200 or one that focuses on smaller caps could be a timely play.
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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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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