FYI | Nov 23 2016
By Peter Switzer, Switzer Super Report
What could go right or wrong for stocks? And how should we play them?
The question I’m getting most is: how should we play stocks for the rest of the year? Of course, the shorter the timeframe, the harder the ‘guessing’ is because the curve balls can come from anywhere but I like to identify as many as possible and then rate their potential positivity or negativity for the stock market.
On a 2017 basis, I am very confident that we can:
- rule out a recession in Australia and the USA;
- the China and Japan economic stories should be better than expected;
- with the usual volatility we have seen this year, I see stocks on the rise as both the economic and earnings stories are good for stock prices;
- Donald Trump is bound to have a good start economically with the US economy set to beat 3% growth, but there could be some political bombs that go off along the way; and
- after being so close in 2015 (5,995), I think it’s time to believe our S&P/ASX 200 index can get to 6,000 in 2017 and I’m expecting some good showings, as we’ve seen recently, from a lot of our top 20 stocks after a couple of tough years at the office.
But the short term could be tricky, though I think there will be a Santa Claus rally as we get close to New Year. Here, history is on my side and this is what Business Insider said about it:
“According to the 2016 Stock Trader’s Almanac, since 1969 the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons — the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average. Nevertheless, each year there is at least one day of declines.
Alternative research over a longer period confirms the persistence of these trends: According to historical data going back to 1896, the Dow Jones Industrial Average has gained an average of 1.7% during this seven-day trading period, rising 77% of the time.”
OK, so you’d think with Trump optimism everywhere there’s a good chance that we’ll finish higher this year and roll into a good start to the year January for stocks.
That said, history shows bear markets and wars are more likely in the first half of a four-year presidency. Kiplinger.com says: “Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively.”
OK, so maybe Goldman Sachs is right when it suggests we “curb of enthusiasm” post-election.
Let’s see what their crystal ball is predicting:
- The US economy is unlikely to see a recession in the immediate future as growth quickens and the odds of a recession over the next couple of years “look relatively low, and [analysts] see signs of firming growth in recent data.”
- Trump’s policies won’t show much until the end of 2017, so 2018 and even 2019 might be more positive for stocks players.
- They see his tax and infrastructure plays worth about 0.6% to GDP growth, which says the Yanks could be in over-3% growth territory.
- They think his protectionist policies, the size of the current budget deficit, which has been falling, and the fact that unemployment is so low there could be some negatives that could lower the expected Trump growth surge.
Away from Goldman’s speculation and on more short-term drivers, we could see a nice bounce for stocks over the next couple of weeks as Trump names his support team.
Mitt Romney, who was a Trump critic pre-election, could be a market plus if he winds up as Secretary of State. Trump needs to show the market that he has a sensible, winning team and given his love of winning, I can’t see him picking a dumb, market-killing outfit. His Treasury Secretary will also be a key hire for market positivity or negativity.
The next short-term market issue is the November 30 OPEC meeting, and following the Iranian oil minister comments, pundits were saying an agreement could push oil to $US55 a barrel and this would be good for stocks.
“We are receiving positive signals that increase the likelihood of agreement at the meeting … and I’m optimistic about the situation,” Iranian Oil Minister Bijan Zangan told state television by telephone, after meeting OPEC Secretary-General Mohammed Barkindo in Tehran, ahead of the November 30 meeting.
“I think if we can reach an agreement, God willing, the price would rapidly reach above $50 per barrel … If non-OPEC (producers) also cooperate, I don’t think $55 per barrel would be out of reach.” (Bloomberg)
The real worry for me is the Italian referendum on December 4.
Polls on Friday suggest PM Renzi’s bold play could end in defeat, which could lead to his once promised resignation and throw the European Union into disarray.
In a nutshell, express.co.uk explains the referendum: “The referendum is over the introduction of major reforms to the country’s notoriously slow and costly government.
Italy has a “perfect” bicameral system – meaning its two chambers have the same powers as each other.
“This often leads to political gridlocks, and Mr Renzi is now calling to reduce one of the house’s powers.
“The referendum proposes to radically transform the Senate – from a chamber of 315 directly elected politicians and six lifetime appointees to smaller Senate of Regions.”
The “no” vote is 42% and the “yes’ vote is at 37% and if the negatives win, then it’s thought, according to the Guardian, that “the anti-establishment Five Star Movement, founded by comedian Beppe Grillo, [could] seize power in the next election”.
The PM Matteo Renzi has promised to resign if the referendum fails and if he does, the EU and a potential Italy-exit or Itexit could hurt financial markets like Grexit and Brexit did.
One big hope for markets and the EU is the credibility of polling nowadays!
After the Italian affair we then face the Fed and its expected interest rate rise in mid-December.
The markets think it’s a certainty and so do I but if Italy and the EU throw a worrying spanner into the works, then it could worry the Fed but it would have to be pretty bad for Janet Yellen to stand up to the expectations of the President-elect Donald Trump, who thinks the rate rise is overdue.
Clearly, Italy, its referendum, its comedian politician and its implications in a Post-Brexit and Post-Donald Trump world is the greatest upcoming risk to markets.
The only positive I can operate off is that financial markets seem to be able to cope with the wild and wacky outcomes from asking the people of the world what do you really want?
But with interest rates already negative in a Europe coping with a Syrian refugee influx, I’m not sure what could be done to sooth markets if Italy plays the “I’m sick of typical politicians” trump card!
How am I going to play stocks? I will buy the dips when the news is bad but I will let the market run until there’s an upturn and then ride the market up as I think 2017 will still be good for stocks.
Quality growth stocks such as the banks will be my target but I could be willing to go after those companies that promise income and capital gain.
I will be buying income stocks when the yields scream “buy me”.
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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