FYI | Jun 03 2015
By Peter Switzer, Switzer Super Report
We started this year with the S&P/ASX 200 at 5411 and ended last week at 5777.2, so that’s a 6.8% gain before you throw in dividends. Let’s call it 8.9% among friends!
Someone cautious like CMC Market’s Michael McCarthy agreed with me that we should see 6000 this year and 2016 should bring 6800, which would then mean we had then beaten the all-time high. I have often said to you that history says markets beat their all-time highs on the upswing from a crash, unless they have been bubbles, such as the Japanese market in the late 1980s and the Nasdaq in 2000.
Repulsive negative views
The Yanks have already done it, so we could be vulnerable to them creating a crash for themselves, but I maintain the balance of data, the profits of US companies and the demeanour of good market players, all make me repulse excessively negative views on stocks.
Why? It’s simple. Loose monetary policy (or QE programs) is keeping interest rates low so stocks look like value. By the way, when interest rates on term deposits were over 5%, a P/E of 20 made me start weighing up whether stocks were a better bet than safe term deposits. Remember, rising interest rates usually run ahead of a market sell off. This is another reason I remain firm on stocks.
With term deposits at 3% or less, then a P/E of 30 might be a more appropriate time to think about playing it safe, though it sounds crazy I admit.
The market P/E is around 16, while the historical monthly P/E over the past 20 years is 14.3, but this benchmark was created when official interest rates were way over a zero in places like the US, and 2% in Australia.
I think you have to adjust your P/E attitude to accommodate the strange times we’re in. And it’s why I think this bull market is to be a longer, more sedate-rising and drawn out one, which suits me fine.
The professor
Another reason for sticking solid to stocks is the analysis of Professor Ron Bewley, who surveys the analysts. This chart shows what he expects the index to do.
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Over the next 12 months, we take out 6000 and he says the consensus points to 6500. If he;s right, and he’s often on the money, I’d be happy with that result.
But even more interesting is his sector analysis of what the analysts are tipping.
They have the index up 11% plus dividends of 4.5%. I’d be happy with half of 15.5%, so this collection of data is a ripper. But what about energy? Up 40.4%! Once again, I’d cop half of that call and be prepared to yell “Yahoo!”
Industrials at 16.6% and even financials putting on 14.4% look pretty damn good. (I should say Ron put this out the week before last, so some of that financial comeback, which I suggested looked likely two weeks ago, has already happened).
But this sounds all too good to be true and maybe it is, but recall I have been halving the forecasts and they still look miles better than term deposits!
The worries
So, what could hurt these great stock stories? Not much because I think the US economic recovery will show up as the year progresses.
Europe is getting better, albeit at a slow pace, and the Greek debt tragedy hangs over the economy. The final Act in this long drawn out drama comes at the end of June and a Greek exit and default would hurt stocks at a time when the Yanks are overdue for a correction. However, I think the Greeks will get a deal and as I’ll be in Greece over June, I will be updating you as the month unfolds.
I might also be interviewing the Greek finance minister, Yanis Varoufakis in Athens, so I’m watching this story closely and I did like seeing the US Secretary of the Treasury, Jack Lew, getting into the Greek-Eurozone battle, to avoid an accident that might rock and rattle markets.
Still buying on the dips
Greece is not important to the world economy but if it defaults and leaves the Euro zone, countries like Portugal, Spain and Italy might see it as the easy way out.
The stakes are high and I’ll be surprised if world leaders allow Greece to destabilize the international financial system. This is a bet on common sense prevailing and I must admit I’m a little nervous, as common sense is not too common in the old Common Market or EU!
At home, I’m furious about the likes of the SMH talking about a recession because talk like this can actually help create one! The investment figures weren’t great and this week’s GDP numbers could be under 2% but that will be a calculation for the three months to March.
I think the June quarter figures will have a Budget pick up in them and, over the next three months, I expect to see improving data and some surprise improvement in corporate profitability.
The future will be volatile but it does not look like Greek to me so I will be poised to buy stocks on the dip, as I have been doing, and suggesting you do too, since March 2009.
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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