FYI | Jul 21 2020
By Peter Switzer, Switzer Report
How would you like to make 30% a year in quality stocks?
What you’re about to read is a risky play using the best quality companies and you need to answer the question: “How would you like to make 30% in a year buying top quality stocks?”
And because you have to be a risk manager when you’re investing away from the safety of bank deposits, I have to ask: What if you might only make 15% per annum or in the worst-case scenario, only 7.5% a year? Oh yeah, plus franking?
What’s the stock?
That’s simple, any ETF for the S&P/ASX 200 — IOZ, STW or A200. Of course, if you want to go for our top 300 stocks, you can think about VAS.
So, what’s my thinking? And why am I tipping 30% in a year as my best-case scenario? The following chart will help explain it all.
S&P/ASX 200
Our market peaked at 7162 just before WHO told the world that we’re in a pandemic. Our stock market crashed to 4546, which was a 36.5% slump and has now climbed back to 6033 [last week]. That’s a 32.7% bounce back. But when a market falls 36.5%, it needs to rebound 57.5% to get back to where it was before we learnt to live with something called the Coronavirus!
So in round figures, we need to see another 25% before getting back to our old pre COVID-19 high for the S&P/ASX 200 Index.
If this can happen within a year, then 25% plus dividends and franking gives us a round figure of 30%.
If it takes two years it’s 15% per annum and if it takes three years it’s 10%.
The next question you’d have to ask me is: what’s the history for market rebounds after a stock market crash?
After the GFC, I interviewed one of Australia’s best data miners in the world — researcher Phil Ruthven, the founder of the internationally-respected IBISWorld.
I asked Phil about how our market has rebounded after a crash. He said historically in the first year after a crash the rebound ranges from 30% to 80%!
S&P/ASX 200
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From the chart above, you can see in the GFC, the rebound didn’t start until March 2009. But by November it had shot up 44%. But it took until 2019 to pass the old high reached before the crash in 2008. On that criteria, given we only need 57% to get back to where we were before the crash, and we’ve rebounded 30%-80% in the past, then an ASX 200 ETF looks like a fair bet.
But let’s look at how long it takes, say, the All Ords to regain its old high. This chart is the All Ords Index – Real. This means it’s adjusted for inflation. But it does the job telling us how long we’ve had to wait to beat a pre-crash high, giving us an idea of how long it might take for a rebound to appear.
The wait can be long. How about the wait from 1969 to 2004! That’s 35 years! Then there was the 30-year wait from 1937 to 1967!
So maybe my call of getting back to 7162 within one or two years looks very optimistic. But does history give us a hope in Hades of it happening?
Have a look at 1929-1933. Back then the wait was only four years. So, after the worst crash of all time, the bounce back was faster than most.
And given what the market has done in recent times, it was the fastest crash of all time. And the trigger? A pandemic and global economic closedowns — it might be valid to argue that we could see the fastest bounce back of all time.
By the way, I’m not alone in thinking that a fast crash leads to a possible fast rebound.
Percy Allan in his My Market Analysis noted over the weekend said: “Many market commentators are seeing through the flash economic crash of March/April to better times ahead. They accept this recession is the deepest since the 1930s Great Depression but think it will be the shortest on record, especially if a vaccine is found.”
He goes on: “Unlike previous recessions and market crashes this one was not caused by an interest rate or oil price spike. On the contrary credit is plentiful thanks to central bank liquidity creation, corporate borrowing costs are at record lows and oil prices are depressed.”
I agree with Percy and his expert buddies. I think a vaccine or very effective treatment is crucial to a quick bounce back of stocks. In Saturday’s Switzer Report, I pointed to Goldman Sachs’ virus expert, Salveen Richter, who thinks that the rapid spread of the virus has led the US government to fast track the development of a potential vaccine. He predicts “a vaccine may gain US approval in 2H20.” (CNBC)
Apart from the US economy’s fate, clearly Donald Trump’s best bet to win Americans back before the November election is to be the driver of the arrival of a miracle vaccine.
Right now, there are 140 teams searching for the ‘Holy Grail’ vaccine. The one group that got a lot of attention last week came from Moderna. Fact-checker outfit theconversation.com came up with this conclusion on the tests from the company: “The results are promising. At least they proved the concept. The results show that when you give this vaccine, the body makes antibodies. But we don’t know whether those antibodies will lead to immunity in the body because all of the results that we have are observed outside the body [in blood samples].”
I wrote a couple of weeks ago that there were 10 legitimate reasons for stocks to pullback, especially with rising infection rates in the USA in particular. But I did say only promising vaccine news could keep Wall Street buying. And that would affect stock markets here and worldwide.
If we see a vaccine in 2021, then my rebound of the Index back to 7162 is a good chance. But either way stocks will rise on good vaccine news and there will always be a dividend of something around 3%.
Obviously, there is an argument that you wait for an overdue sell off, maybe linked to company reporting or the effects of the US election campaign that will soon kick off in earnest, and then think about this play.
Either way, I like investments when you’re buying quality at good prices and especially when they pay dividends along the way.
My own SWTZ got as low as $1.68 and is now $2.22 after being $2.70 before COVID-19 struck. That was a 32% jump in four months plus dividends are tracking for a 3% return.
It’s nothing flash compared to the likes of Afterpay but it’s good for what it’s supposed to do. But with all investments, other than local bank deposits, it comes with risks linked to the Coronavirus, what governments do and how markets respond.
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.
Content included in this article is not by association the view of FNArena (see our disclaimer).
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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