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Three Market Killers And My Care Factor

FYI | Apr 01 2015

By Peter Switzer, Switzer Super Report

There are three obstacles we must get over to ensure that stocks head higher. Let’s identify them and rate the chances of these market killers being KO’d.

Obstacle 1

The first is like the fat guy at the end of a tug-of-war rope — the US — and I’m not making cynical inferences about the country’s diet as well as its waistlines.

Until the Aussie economy fell into a hole that I think we can climb out of in the second-half of this year, we were the best ‘house’ economy on the worst street. The Yanks now have taken that tag as the other residents use QE programs and/or lower interest rates, as in the case of China, to renovate their ‘houses’.

However, where our demand for international goods and services can be ignored, not so the US. As the global economy tries to make a comeback, the US economy needs to step up just as some expert analysts are doubting their economic recovery.

This shortened week delivers a huge box of economic data that could sway economists to the positive, or the negative, with everything from house prices, home sales, car sales, consumer confidence, income and spending as well as the biggie — the jobs report.

A few years back, the IMF showed the importance of economies to global demand. Out of a 4.4% global growth rate, China was responsible for 0.81% while the US was 0.74% – combined they are responsible for 35% of world demand!  You can see how crucial these two economies are when you see India is third at 0.18%, while Japan is 0.14%. In case you’re wondering, Germany was good for 0.13% global growth.

I’m not in the ‘US recovery will disappoint’ team.

Keeping me positive is the Fed boss, Janet Yellen, who doesn’t look like she will rush to raise rates.

Her stance has Professor Jeremy Siegel of the Wharton School of Finance in Philadelphia tipping fair value for the Dow Jones index is 20,000! In case you don’t follow the index closely, it is now at only 17,712.66! That’s not going to happen with a big economic slowdown in the US.

Obstacle 2

The second asset assassin out there has to be very bad news out of China. Above I showed how important China is for the world economy, but it potentially could rock financial markets if growth slowed much more than expected.

The OECD thinks China’s growth will slow to 6.8% this year but for the ASEAN group of 10 that includes China and India, this is what it predicts:

“Annual GDP growth for the ASEAN -10, China and India is forecast to average 6.5% over 2015-19. Growth momentum remains robust in the 10 ASEAN countries, with economic growth averaging 5.6% over 2015-19. The region remains exposed to domestic and external risks, however, that make continued reform, regional integration and the strengthening of institutional capacities critical.”

In addition it says Emerging Asia “is set for healthy growth over the medium-term.”

This China view is of a bigger economy growing at a slightly slower rate.  Changes are happening but no one at the OECD is tipping disaster. This is how they see China: “China’s growth is forecast to slow to 6.8% over 2015-19 as it adjusts to changing demographics, a shift from investment to consumption led growth and agricultural, environmental and educational challenges.”

Let’s look at the Shanghai Composite to see if there are concerns showing up there:
 

Taking a line through this it suggests that if a fly ball from left field is heading towards China to KO it, the stock market is not seeing it.

Obstacle 3

The third killer of our rising stock market view would be the QE program failing to generate economic growth in the Euro zone or else giving birth to a bubble burst in the bond market.

Ironically, a Reuters story questioned what might happen to bonds with the QE program seemingly starting to show some economic growth green shoots and even the prospect of inflation!

This is what it said: “With signs of a revival in Euro zone growth failing to lift government bond yields off historic lows this week, investors have started to fear the ECB’s asset-purchase scheme may be inflating a dangerous bubble.”

The news out of Europe has been good and it should not be leading to spook factors about the bond market but for so long investors in Europe have chased safe government bonds that if they change their mind on bonds, then there could be some fireworks.

“Business activity as measured by Markit’s flash composite purchasing managers’ index for March was the highest recorded in any month since May 2011, and there are signs the recovery is also accelerating in the 19-nation bloc’s weaker economies,” Reuters pointed out only on Friday.

This really should lead to tighter monetary policy and bond yields going up, which means there could be a rush to get out of current low-yielding bonds which would push bond prices down, bursting the bubble in the bond market that many talk about.

This is the part of the Reuters story that makes me wary of the bond market: “Economists at the Bank for International Settlements warned earlier this month that liquidity, especially in corporate bonds, “could prove fragile if everybody heads for the exits at the same time”.

This chart shows what has happened to demand for European stocks since January and the QE program. Stocks were falling before that time as the chart shows and investors were running to low yielding bonds because they were scared about the European economy.

This could be reversed but whether a bond market crisis will hit stocks when the European economy is on the mend remains a point of conjecture.

All the experts are tipping European stocks are the place to be so they’re all ruling out an unmanageable bond market problem.

I hope they’re right and I am investing that way myself but this is the one possible stock killer I will be looking at very closely in coming weeks.
 

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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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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