I see strong positives beyond the fear

Founder and Publisher of the Switzer Report
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These are volatile times with a capital V, but it doesn’t mean we’ll be stuck with bad times.

That’s especially so if your self-managed super fund is exposed to good quality companies and rock solid managed funds. This isn’t a time to try to beat the index, but there’s no reason why you can’t match the index, which could be set to surprise on the high side over the next 12 months.

Times like these aren’t the right time to change your investment strategy, unless it was ridiculously risky in its approach. That said, switching when a market is looking for a bottom is historically the wrong time to do it. Let me show you why.

In case you need reminding, the Dow Jones index was down 519.83 points or 4.62% to 10,719.94 overnight and the S&P 500 was off 51.77 points or 4.42% to 1,120.76. The Aussie dollar is trading in the 102 US-cent region. All this was caused by fears over European bank stability and rumours of a downgrade of French sovereign debt. Short-sellers and hedge funds used these reasons to rock the market – and retail investors were taken along for the ride.

If this volatility keeps up (and it probably will), the Reserve Bank is bound to cut rates at the September meeting. Money market insiders tell me that a 0.5% cut is possible and a 1.25% chop over the year is expected.

Put simply, the worse the market news, the more likely – and the bigger – the rate cuts will be. If market madness is sustained for a long time, confidence and spending will suffer, jobs will be cut and the chance of a US double-dip recession will increase.

At least for now, most US economists think the States will avoid a recession.

What we need most is some wise intervention from the Europeans over their debt challenges. Let’s hope they can lift their game.

The positives

But stop for a minute while this market and media mayhem gets hyped up to fever pitch, and consider what I will call a Switzer Fabulous Financial Fact. (Regular readers of my www.switzer.com.au daily column might have already seen this fact, but it bears repeating and it should be remembered.)

Believe it or not, but all this terrible news is actually good for stocks. Well, it won’t be in the short-term, but history says it is – even over the course of one year!

Here’s why, and it underlines the reason why you need to be a long-term investor in quality stocks.

Sean Heron, a US portfolio manager at Glenmede Investment Management, says when the VIX – or fear index – is above 30, the S&P 500 return for the ensuing year is 16.3%, and it’s a positive result 86% of the time. That’s very good odds.

He told CNBC that when stocks are oversold, like now, and 90% of stocks are under their 200-day moving average, the subsequent return on the S&P 500 for the following 12 months averages around 30%. But wait, there’s more, and it reinforces the Heron argument.

On my Switzer program on the Sky Business Channel, I interviewed Michael Knox, the chief economist at RBS Morgans. He said US company earnings had been very good and based on the figures coming out of America’s best companies, the S&P 500 should be heading to 1,600.

Yesterday, the S&P 500 was at 1,172 and so the jump to 1,600 would be 36%. If our S&P/ASX 200 tracked the S&P 500 up and added 36%, it would take our index to 5,631!

Now, we haven’t been tracking the Yanks closely lately because of the strong Aussie dollar, but let’s just say we make 5,000, as many forecasters were predicting (admittedly before this recent market collapse), then that would be a 20.7% rise for our index.

So Heron’s analysis suggests a rise of between 16-30% after this current mess is sorted out and using Knox’s different approach and figuring, as well as a bit of adjustment for our currency effects, and I come up with a 20-36% rise over the next year.

Of course, this is speculation. But it’s based on history and while it doesn’t always repeat, Heron argues his history has an 86% turn-up factor. That’s a comforting fact on a day when emotions could be getting the better of rational judgment.

One final point is needed: the big action seen in recent days is driven by those who are trading daily. Some are positioning themselves to make a killing while others are trying to avoid being killed – monetarily speaking.

For the long-term investor in good quality investments, the words of Franklin D Roosevelt should be recalled: “The only thing we have to fear is fear itself”.

Also in the latest Switzer Super Report:

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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