FYI | Jul 13 2016
By Peter Switzer, Switzer Super Report
Well the pessimists on the US economy have been proved wrong thanks to great job numbers, at least for the moment, so how do we play stocks going forward? Is this time to position ourselves for another leg up or should we wait for another dip in the market to be a buyer?
Remember, the S&P 500 ended at 2129, which was two points off its all-time high. If they had taken that level out, I would be much more bullish but the failure to bust through and go higher says a lot about all the other worries out there. [Note: Written prior to S&P500 bursting through to new all-time high – Ed]
Like what? Try these:
Brexit and what it might mean. Italian banks and could they rock the financial system? Could the UK slide into recession? Could the EU face an economic jolting bust up? Is this as good as it gets for the US economy? Is the bond market right with its unbelievably low yields predicting economic problems ahead? Ditto for the price of gold. Could the rising rig count in the US recreate the oil price problems we saw last year that came to a head in January/February? Don’t forget the Donald Trump card that a lot of cranky Americans just might play, like those who voted for Brexit, Pauline Hanson and Derryn Hinch.
Let’s go through each of these one, one by one.
Brexit and what it might mean? In reality, this could slow up global growth but the central bank reaction to the fear of Brexit could mean more stimulation and more growth.
Italian banks and could they rock the financial system? My talks with banking experts say that the EU has always been ready for the Italian banks issue and the other banks in the EU have reduced exposure. I hope they’re right.
However, as John Maudlin pointed out in Forbes.com, “Italy will probably be Europe’s main headache. Its banking system is already breaking down as non-performing loans proliferate,” he wrote. “Non-performing loans make up almost 20% of Italian banking system assets. Some southern banks hold nearly 40% non-performing loans.”
Could the UK slide into recession? Yep, but the Bank of England will try to offset any Brexit loss of demand by adding to the money supply. Also the pound has depreciated by about 12% against the greenback, which will be a big help to the UK economy. And by the way, the UK is only about 2.5% of the world economy, so don’t get too worried about the Poms and their Brexit.
Could the EU face an economic jolting bust up? The answer to this could be that it’s possible. The EU will fight tooth and nail to prevent it but it’s a risk. Greece, Syrian migration, Turkey as a member and the growth of right-wing reactionary groups could really unsettle the EU and its contribution to global growth.
Is this as good as it gets for the US economy? It’s a lot easier to say don’t worry about this one, with most economist bumping up the quarter two growth forecasts from 1.1% to 2.5% or so. Move on, nothing here to see.
Is the bond market right with its unbelievably low yields predicting economic problems ahead? I don’t dismiss the bond market and the key players there are often right but the US economic story remains the best argument against the bond market’s negativity. However, as you can see, I can’t hit this concern to the boundary for six. I’m playing this one defensively with a very straight bat.
Ditto for the price of gold? Yep, afraid so and ditto for my concerns.
Could the rising rig count in the US recreate the oil price problems we saw last year that came to a head in January/February? It could help bring oil prices down but the outlook for oil remains pretty good with experts expecting balance in the market. A falling price is possible but no one wants to talk scary prices like we saw in January, where the likes of Goldman Sachs predicted a $US20 a barrel price. It now expects $US50 a barrel in this half of the year. I hope they’re right this time.
And what about my ‘Don’t forget the Donald Trump card’?
Trump worries me and Hillary Clinton would be better for stocks. That said, Wall Street is warming to Trump. In September 2015, CNN ran with the headline “Trump terrifies Wall Street” but now CNBC has come out with: “How Donald Trump is winning over Wall Street.”
I must say I have been saying that Trump won’t let promises get in the way of making it easy for Wall Street to go higher. We don’t need another curve ball for the global economy and world stock markets, so I’m sweating on a Clinton victory.
As you can see from the list above, there are reasons to be cautiously positive but there are threats out there and I didn’t even throw in the China curve ball. I think the stock market will grind higher, creating some buying opportunities before selling off, etc.
I think there’s a good chance we could see our stock market index at 5600 or higher this year. CMC’s Michael McCarthy is at 5900 and I hope he is right but there are so many curve balls out there that we’re going to have to hit, that it’s no wonder the Yanks couldn’t take out the all-time high on the S&P 500.
But I reckon they will this week [yes they did] unless some new problem bobs up but with so many issues out there I can’t see a huge surge until we get a great run of economic and company earnings news.
If the US reporting season is good and I’m expecting that and our show-and-tell season also beats expectations, then the last couple of months this year should be great for stocks.
Only Donald could trump my guarded optimism.
Right now bet365 has Clinton at 3/10 while Trump is 5/2. I hope the bookies get this more right than they did Brexit, though their view on Malcolm as PM showed they were on the money there. Go the bookies.
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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