FYI | Mar 09 2016
By Peter Switzer, Switzer Super Report
In case you are wondering just how good the past few weeks have been to long-suffering wealth-builders like all of us who are Switzer Super Report supporters, here is a quick summary: US and global shares are up 9%, Australian shares are up 7%, oil is up 37%, the $A is up 8% and iron ore is up 34%.
But the sensible question you might have is: “Can it last?”
Geoff Wilson of Wilson Asset Management is in the “no it won’t” group. He looked at the history of bear markets, which I’m not sure is relevant as we only went into bear territory for one day, but on his reckoning the safer time to chase stocks will be around September.
By the way, he’s not the only fund manager/expert who has expressed this “I can’t wait for September” song for stocks, so there could be something in it.
When I interviewed him on my Sky Business TV show last week he did kind of indicate that the old market maxim “sell in May and go away, come back on St. Legers Day” which happens to be in September has some significance this year.
Now I know Geoff would have more analysis around his speculation on when to buy and sell stocks than a nice little market rhyme but it’s worth thinking about this famous market maxim that gets trotted out every year in market scribblings in newspapers and websites.
Over the past 20 years, the S&P 500 was up 13 times between May and October, so the strike rate for a bad May to October (7 years out of 20) is only 35%.
In contrast, the market goes up between November and April some 85% of the time, which could explain why there is a selling in May as profit-takers pocketed their gains.
During a sell-off period valuations fall which then make shares more attractive, so it kind of makes sense that if May to September/October is bad for stocks then the ensuing period will be good for stocks.
Back to the here and now and CNBC says research from a company called Bespoke shows the US stock market has its best two-month rise in March-April with an average rise of 2.66%. Interestingly the work also shows that if the year starts with a bad January-February, like this year, the gain in March-April, is 2.58%.
The first two months saw the S&P 500 go from 2012 to 1829, but there has been a comeback with US shares rebounding 9%.
Over the next two weeks there will be a number of central bank decisions — Europe, Japan and the USA — and there will be closely watched economic data from China in particular, which could hurt or help stock prices.
And then there is the OPEC production freeze meeting with Russia on March 20, which could be a big game changer for stocks with the S&P 500 index so closely correlated to the price of oil.
If this fails then the good work on the stocks turnaround could be undermined. That said, the smart fund managers like Geoff Wilson aren’t easily ignored as I think they often think alike, so a belief that stocks will dive in May and rebound in September/October could become a self-fulfilling prophecy!
However, here is the main reason I remain bullish on stocks and it will make me a buyer again if stocks are sold off — the economic outlook for the USA is not a recession-bound one anytime soon and central banks, I suspect, still have market power.
For example, if the Fed does not raise rates in March and then says the right things to soothe market concerns, then Wall Street could easily start heading up again, even over the tricky May-October period.
A lot can go right and a lot can go wrong in coming weeks and months but let me paint the best possible scenario, which could make CMC’s Michael McCarthy’s 5,400 call on the S&P/ASX 200 index very possible this year. In fact, if my scenario happens we could see us threaten 6000 again, just as we did in March of last year.
Here’s my possible wish list:
• The Fed infers the US economy is good enough to see rate rises but they won’t be too fast.
• US economic data actually trumps the doomsday merchants who collectively beat up on stocks unfairly earlier this year.
• Someone trumps Trump — financial markets don’t need a wild card like Donald.
• The ECB this week comes up with a credible play to stimulate Europe more.
• The ECB’s and Japan’s QE programs actually bring better growth rates.
• Chinese economic data this week does not fuel global slowdown fears that prevailed earlier this year. [Trade numbers subsequently not good — Ed]
• OPEC pulls off an oil production freeze to stem further oil price slides that have spooked the US stock market.
• The RBA cuts interest rates if our dollar goes too much higher! (I have always argued we did not need a rate cut because I knew our economy was better than expected but if our dollar goes too high then I’d support a cut to ensure the good economic growth number we saw last week can be sustained.)
I’d love this year to be one of those 65% years where you don’t sell in May and go away, instead being a buy in May and stay!
With a lot of the spook factor around, this could be a long shot hope but as I say, if we sell in May, well I’ll be a buyer if it all gets stupid and quality companies that pay consistently good dividends become attractive.
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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