Watching the stock market for an SMSF investor is a bit like watching a game of footy and that’s the way I see the market playing out this year. To steal a footy term and butcher it a bit, the market will be a game of three-thirds – not two halves.
We have had the first third, which was a great sequence of play, especially in the US. Even now with Wall Street off its early highs, the Dow is up 5.17% while the S&P 500 is still up 8.96% since the start of the year. That’s sensational given we have seen two down weeks in a row and anyone would be happy if their portfolio was up 8.96% in three months. At home, our ASX200 is up 6.57%.
The second third
Why wouldn’t some investors be selling now and waiting for October to get back into the market when the Yanks have their typical Santa Claus rally, especially when November will bring the end of speculation of who will be their president for the next four years.
But in between we have the “sell in May and go away” challenge to deal with up until October and there are plenty of worrying issues that could make many stock players take their money and head for the hills.
I think the biggest worry is Spain pushing bond yields up towards 6%. We had hoped that the European Central Bank (ECB) had sorted out a lot of Europe’s debt default concerns by lending a trillion euro to EU banks for 1% for three years. The EU has built up its arsenal of funding for bailouts to a seriously high level, and this is meant to be good enough to buy some time for European governments carrying big debt issues.
That will be the test over the next two months and how this plays out will have a big bearing on what happens post-May.
One interesting positive will be the Facebook float, which will be the biggest initial public offer (IPO) in history and that could bring a lot of new money into the US market, with the good sentiment hopefully rubbing off here.
Also, oil prices are falling and that could stimulate global stocks. This could be assisted by the Chinese, who could easily loosen up monetary policy to try to get some more economic growth after their latest gross domestic product (GDP) figure came in lower than expected over the weekend at 8.1% compared with an 8.3% expectation. By the way, growth in the last quarter of 2011 was 8.9% and so we are seeing a slowdown, though it is still above China’s target growth of 7.5%.
Meanwhile, the US economy and company earnings could still surprise on the high side and I was enthused by Goldman Sachs guru, Abby Joseph Cohen, who indicated on CNBC that earnings for some key companies in the United States could surprise on the high side.
She talked about some areas of “significant surprise” on the positive side and the Yanks are even talking about a spring bounce back for house prices. Experts point to the recent jobs surge, cheap loans, low home prices and higher consumer confidence as reasons why house prices could start to rise.
If the Yanks were a footy team, I would predict it to lose momentum in the second-third period but come home strong in the final period. And because our Reserve Bank of Australia (RBA) should cut interest rates a couple of times this year, especially with China’s growth slowing, I reckon our market could end up having a pretty good finish as well.
One final point has to be made for the long-term investor – we will eventually have a big bounce and that’s when those who buy great companies will get their big payday.
As Rod Stewart’s ex-wife, Rachel Hunter, once said of a shampoo’s ability to rejuvenate someone’s hair, “It won’t happen overnight, but it will happen.”
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