Okay, the stock market has been nice to investors and my clients since October with Wall Street up over 20% and we have put on more than 10%, but the critical question is can it last?
An even more interesting question is: can Aussie stocks surge over 40% as one very credible expert predicts?
There is now no question that the United States is doing miles better than most so-called economic and market experts predicted, present analyst excepted, and this development in total provides a growing number of positives that will eventually turn the persistent ‘go nowhere’ stock market we have coped with for around two years.
Low rate pledge
Yesterday, the US Federal Reserve chairman, Ben Bernanke, gave stocks a future boost by saying interest rates won’t be rising until 2014! In Australia, most experts are tipping a cut in February and some are going for a doubling up with another cut in March.
I doubt we’ll get a double-down play from the Reserve Bank of Australia, though if the European Union plays its usual disappointing game and a financial meltdown threatens, we would see double downs alright and they could be 0.50 percentage point cuts as well!
I personally rule this outcome out based on what the EU knows is sensible, achievable and terrible. Working through the challenges of the possible debt defaulters of, say, Greece and Portugal is both sensible and achievable, but if they walk away from their debts, it could lead to a terrible contagion. This is unthinkable but still possible and that’s why there has been a measured lift in stock prices lately rather than the boom that will eventually happen.
I hate guessing market moves based on what people in power do – I’d rather it be based on economic, financial and business trends, as I’m trained for those kinds of things. However, the unpredictable nature of the Portuguese, Italians, the Irish, Greeks and Spaniards – or the PIIGS – is more the domain of psychologists!
That said, if the EU and the eurozone can achieve a credible set of agreements from its members, and interest rates keep falling or remain low, then investors will drift back to stocks first and then eventually zoom back.
I reckon if nothing convincing happens, that the worst will be behind us by April, then the old market cliché ‘sell in May and go away’ will be a serious test for the market.
Is a 40% gain feasible?
However, I do think we will see the market bounce back this year. Current bear and fund manager, Geoff Wilson, thinks the bear market ends in 2013 and IBISWorld founder, Phil Ruthven, predicts a 40% rebound of Aussie stocks by at least 2013 as well! He says they are terribly undervalued and, by the way, Phil along with CommSec’s Craig James were about the only two people who were publicly agreeing with me when I was predicting Australia could avoid a recession through the global financial crisis.
Lately, this is what I have seen that sustains my cautious optimism:
- Yields on European sovereign bonds are falling.
- US consumer sentiment is spiking to nine-month highs.
- US unemployment is down to 8.5%.
- The chartists say the ‘technicals’ point to a rising market with the so-called golden cross.
- Durable goods orders were up way more than expected – 2% predicted, but 10% in reality – which points to a boost in business investment.
- Unfilled orders in the US increased by 1.5% and this was the biggest jump since March 2008, which should help both production and jobs in the future.
- Leading indicators in the States point to solid growth ahead.
- Earnings of top US companies are largely better than expected.
Bloomberg says: “German and French consumers are growing more confident, suggesting household spending may temper the slowdown in Europe’s two largest economies.”
The evidence is clear; the US is making solid progress and Europe is showing some promise, but its history is holding share players back. However, when the lack of faith in the EU is replaced by confidence, then we will see stocks surge by 40% – or more!
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Also in the Switzer Super Report
- Charlie Aitken: Four attractive stock buys
- JP Goldman: New fixed-income investment is coming to Australia
- Andrew Bloore: Should I segregate my pension assets?