Should you lighten up, go more defensive or even cash up?

Founder and Publisher of the Switzer Report
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A very smart guy I know, who believes you can time the market using conservative strategies, was telling me that his current signals say it’s good to get into the market now —for both the short and long term!

This comes as the international economic clouds are looking blacker and global growth numbers look to be weakening.

And this coincides with two quarters of local economic growth that have come in less than economists expected and has led to market analysts raising doubts about the outlook statements of CEOs about potential profits. This obviously would affect future share prices.

It’s not too far-fetched for many of us, who are very long stocks, to ask the question: “Should I lighten up, go more defensive or even cash up?”

Let me share with you how I’m playing the changing cards that we’re now being dealt from the local and global economies.

Another colleague of mine, Matt Sherwood, who’s the Head of Investment Strategy within the Multi Asset team at Perpetual Investments, is finding it hard to ignore the latest global growth slide. Matt thinks the local slowdown will hit earnings forecasts. He came up with an intriguing as well as unique take on the lack of oomph linked to interest rate cuts worldwide over the past 10 years.

“We’ve had 700 interest rate cuts around the world and this is the best the global economy can do. All that policy armoury produced the weakest recovery in history.”

He wonders if there is enough monetary policy firepower left to help the world economy get stronger. So, with all these economic concerns out there, can the stock market defy gravity and go higher?

Let’s go around the world looking at the challenges and what’s being done. This should give us a clue of what the future might bring and how you should invest accordingly.

This is how the UK’s Daily Telegraph reported the economic challenges for Europe: “The ECB’s actions on Thursday did catch some off guard. The bank came out all guns blazing to try and counteract the eurozone slowdown, after revising down its growth projections for the bloc from 1.7pc to 1.1pc this year,” it reported. “The most important steps were to effectively rule out an interest rate rise this year and turn the money taps back on through a mechanism called targeted longer-term refinancing operations (TLTROs).”

This involves cheap money for banks, which then are expected to lend it to business and other borrowers that could help stimulate the so-called multiplier effect.

OK that sounds good and now it’s a wait-and-see game.

To China, and as I pointed out on Saturday, Beijing is not ignoring its slowdown. “Premier Li Keqiang cut the government’s 2019 growth target to 6.0-6.5%, as expected, and promised more stimulus, including cuts in taxes, increases in infrastructure investment, and lending to small firms,” Reuters reported.

And only three days ago, The Wall Street Journal shone the spotlight on what President Trump could do for China, helping it get its economy growing. “The U.S. and China are getting closer to a trade deal, and it may arrive just in time for President Xi Jinping in Beijing,” the WSJ explained. “A series of high-profile policy meetings this week and next are highlighting that China needs an outside push to press the policies the country needs to continue its growth.”

All this underlines the importance of the trade deal that now is expected to be inked into history on March 27, which, significantly, is my birthday and what a present this would be!

It’s no coincidence that a global slowdown has turned up and surprised economists when we have had this US-China trade war threat hovering, Brexit undermining UK business and consumer confidence, the EU has been battling with Italian solidarity/fiscal issues and even Germany went close to recession.

As a sign of the times, reports say the weakness in the all-important German car industry and economy generally was linked to the costs of strict emission tests!

This increasingly negative global economic picture was not helped on Saturday, our time, when the US job number came in at 20,000 rather than the expected 180,000! Like January’s 311,000 employment surge, this February revelation looks like a rogue result. I think the three-month average tells a more believable story, where 186,000 jobs a month have shown up, which screams the US economy is doing OK.

Even locally, economists are thinking the 0.2% growth number for the December quarter is less reliable, compared to the ripper labour market stats. As the AFR made the point over the weekend: “Job vacancies, a leading indicator published by the Australian Bureau of Statistics in January, also rose to a record 241,600 in the three months to November.”

And vacancies were up 13.9% on an annualised basis!

So will the signing of a trade deal be a circuit-breaker? I think the stock market might have a less than enthusiastic effect on stock prices than many might think because some of it has been already baked into share prices. The latest S&P 500 chart below shows the rebound in US share prices since December 24 and it was first created by the Fed promising to be patient with rate rises. After the February 20,000 jobs number, I’m sure it will even be more patient! The next leg up for US stocks was good trade deal reports and the extension of the March 1 deadline.

Source: Google

I asked Fairmont Equities founder Michael Gable, who is an expert technical analyst, what his charts are telling him right now. This is what he said:

I think both markets are looking to take a breather here as the rally slows down. However, price action doesn’t indicate that we should expect a steep decline from here, it looks like we’ll consolidate up around these levels for a little bit. That may change but there’s no evidence for anything nasty except everyone thinks we are due a pullback”.

The SP500 has had a slight easing back from an obvious resistance level and the Aussie market has only one day down from this year’s high. So nothing to make me worried. I’m generally sticking with the upside momentum here.”

When you add what the ECB is up to, we throw in the China stimulus plans, on top of a Fed that has promised to be patient with rate rises, and then imagine the positivity that stems from a Trump-China trade deal, there are reasons to believe my market timer and my technical analyst, who still thinks it is buy time, might be on the money.

But wait there’s more and it’s positive vibes for stocks out of the bond market!

Following the worst week for US stocks for 2019, many expected that the bond market would be flashing ‘beware’. But Jim Paulsen, the chief investment strategist at Leuthold Group in the US, who has been a big call merchant I respect, says the signs are positive for stocks.

Looking closely at the bond market, he observed that corporate bond spreads have tightened and that actually suggests that credit risk is improving, while bond market volatility is near its lowest levels ever!

“When you take the bond market’s message as a whole, I think it’s about as optimistic as the big recoveries we’ve had in stocks and commodities so far,” he told CNBC.

Rather than seeing this slowdown as a prelude to a threat, he sees it more as an opportunity! “What we’re seeing is an upward valuation of both stock prices and bond prices, reflecting the fact that the economy has slowed, inflation pressure has lessened and accommodation by policy officials is back and that requires a higher valuation which is what we’re getting in both markets,” he said.

All up, as he looks at central banks pulling back on tightening monetary policy and with the end of trade war talk likely and soon, he doesn’t see a US recession on the horizon.

One final point that keeps me guardedly optimistic is the fact that the US stock market recovery is still below where the key S&P 500 was before the sell off. The chart above clearly shows this. Uncertainty and negativity caused the sell off last year. As this gets replaced with certainty and positivity even more, there remains scope for this market to go higher.

As someone who has been a “buy-the-dip” advocate, I can hardly tell you go longer the market now. But as you can see, despite economic slowdown worries we’re seeing right now, there are reasonable arguments to not go too defensive or to turn tail and cash out. If you do take profit, I will bet that the next dip is a lot shallower than the one we saw in the December quarter.

Important: 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. Consider the appropriateness of the information in regard to your circumstances.

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