February could be challenging for investors

Founder and Publisher of the Switzer Report
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Wall Street ended down over the weekend with both the S&P 500 index and the Dow off 0.16% and 0.58% respectively, but the news was not all bad with the tech-heavy Nasdaq up 0.4%.

And while January is often a good month for stocks, February is often a time for some profit-taking – you’ll hear words such as ‘consolidation’ used more widely over the next month.

Looking back at January and the Dow is up 3.63%, the S&P 500 is 4.67% higher and our own S&P/ASX 200 is up 5.7%. Given these rises you don’t have to be George Soros or Warren Buffett to expect some investors and fund managers will want to bank some profit.

But what will be the drivers for the rest of the year?

Investors’ nervousness will be critical because there are mountains of cash around the world earning low interest rates, and the owners of that cash will face the dilemma of: “Do I keep playing it safe or do I dip my toe back into the stock market?”

Fear is falling

Right now, the VIX – or fear index – says that in January some Nervous Nellies did go back to stocks, with the index down to 18.53 last Friday. Remember, it was approaching 40 last year and was around 80 when the global financial crisis (GFC) was at its scariest.

Helping this positive trend has been US economic data, which mostly points to a better economy ahead, though the last quarter gross domestic product (GDP) figure came in at only 2.8% when 3% was tipped. However, this was the best growth rate for 18 months and came at a time when the experts were predicting that the US would double dip into recession!

Adding more credibility to optimism was the University of Michigan consumer sentiment index which hit an 11-month high this month, jumping around five points over a month to a reading of 75.

Meanwhile, the Greeks, it is reported, are close to a deal with their private creditors. This could be really big news this week that will help the market, but you do always have to be careful about Greek news.

What we’re watching this week

On the company earnings front, CNBC says according to Thomson Reuters only 59% of companies that have reported their earnings have beaten expectations and that is below what generally happens. So, US companies have been battling, but keep in mind that these are figures coming from the third quarter, which followed the worst of the stock market news in August and September. This is when there was talk of another GFC and a Lehman Brothers-style failure focused in on the chronic debtor countries of the eurozone.

Aside from the Greek debt swap deal this week, there are other big market-rattling – or helping – stories ahead.

Wall Street will be watching the S&P Case-Shiller home price index, the Chicago PMI, consumer confidence, the ADP private-sector employment report, the ISM manufacturing index, chain-store sales, ISM services index, and the biggie — the jobs report on Friday.

On the local front, private credit figures, home prices as well as sales and building approvals will be monitored, but they will all be speculated upon based on what they mean for the interest rate decision next Tuesday.

The smart money says the Reserve Bank of Australia is set to cut in February and others think it will happen again in March, but that is a much longer shot than a rate reduction next week.

By the way, the more our interest rates fall, the more attractive our stocks will look.

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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