The case for sticking with stocks was made even stronger when Australian Treasurer, Joe Hockey, talked the G20 finance ministers into going for growth targets, which will pump up growth by 2% or $2 trillion over the next five years. And be clear on this, the stronger the global economy grows, the greater the chances are that this bull market for our stocks will keep running.
This good news about a more pro-growth G20 is especially important for an economy such as Australia, where many of its top companies are key exporters. The likes of BHP and Rio will be big beneficiaries of a faster growing world economy.
Results support 6000
Right now the results from the local earnings season have been encouraging for optimists like yours truly, who have a 2014 target for the S&P/ASX 200 of 6,000.
Aggregate profits of the 98 companies from the ASX 200, which had reported by last Friday, were up 18.4% on a year ago. This means that the economy in the last six months of 2013 was good enough to deliver this significant jump in profits. But a lot of it has come from cost cutting.
Craig James of CommSec says “just over 60% of companies have lifted dividends while just over 25% have left dividends unchanged.” That said, dividends have only lifted 3.9% on a year ago.
But what I really liked, which entrenches my optimism for stocks and the economy generally, was the fact that total cash of the 98 reporting companies was now at $71.1 billion at the end of December. This was up 44.8 per cent on a year ago!
So what will they do with this dough? They could increase dividends, which is a tick for stocks. They could invest in new business, which should help both jobs and profits and this has to help stock prices’ potential. There could also be a greater interest in mergers or takeovers, which, if you pick the target well, can be great for share prices.
Back in March 2009, the market finally followed my optimistic script to spike higher when the US administration’s rescue plan for its banks, IAG and carmakers, and the Fed’s decision to pump money into the economy, came into effect.
As Sir John Templeton once observed: “Bull markets are born on pessimism” and I think that this was what happened in 2009 and 2010. He then predicted that “they grow on scepticism” and this was 2011 and 2012. He pointed out that a bull market will “mature on optimism” and that looks like 2013, 2014 and I suspect it will roll into next year. Prophetically he says a bull market will “die on euphoria” and my guess is that this will be after 2016 but it could be a slower death if the G20 mob does as they promise and pursue growth.
Doubters still linger
I expect volatility — the market will go up and down with bigger swings — to prevail this year because there are still enough doubters out there who have stopped the euphoric phase taking hold. Euphoria will happen when the Yanks are growing without tapering, inflation is starting to be the key worry and not deflation, interest rates are on the rise and Europe is growing faster than it’s set to grow this year.
The noted scaremonger, Marc Faber, is again warning the US bull market will end badly but his doomsaying has lightened off a tad. He told CNBC that, “In the US, it’s probably too late to buy.” This is a lot less emphatic than he was a couple of years ago and even a couple of months ago. And a good omen that he isn’t expecting to be right any time soon.
However, he did give an interesting tip that emerging economies are a good investment provided you take a long-term view. He argues he can make more money in these beaten up economies but, once again, it is a long-term play.
On more current investment strategies, 1848 to 1851 are important technical levels, which should be tested on the New York Stock Exchange this week for the S&P 500 index.
If the market fails to reach this level, there could be a sell-off, but if it punches through, there could be another significant spike higher. With shocking weather hurting economic data at the moment, it looks less likely that a really good news reading is going to come from the US statistician in a week with lots of data.
I wouldn’t be surprised to see this weather/data issue create another sell-off but when the US economy thaws out and data starts to rebound, then Wall Street will come back and it will help our market surge again as well.
And I liked this view from Thomas Lee, who is the JPMorgan chief U.S. equity strategist. He thinks the market leadership will change soon and that cyclicals will start to outperform, led by tech and materials.
This is why everyone is backing the likes of BHP and Rio and, in turn, this has to be good for our stock market.
Ducks line up
The ducks – global growth to better local company balance sheets to a lower dollar and low interest rates – are all getting lined up in a nice row and are keeping me confident about stocks for 2014.
Of course, Joe’s efforts over the weekend helped but he can ensure he does not undo his good work by making sure he does not go for a horror budget this year. He can play that game in 2015 when the economy is stronger and companies are on a growth roll with higher share prices!
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Also in the Switzer Super Report:
- Paul Rickard: Banks still worth it
- James Dunn: Solid profit season moving to a close
- Penny Pryor: Shortlisted
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say
- Gary Stone: Has the commodity cycle turned?
- Tony Negline: How to segregate assets in an SMSF
- Brittany Ruppert: New record clearance rate high of 82%