FYI | Oct 07 2015
By Peter Switzer, Switzer Super Report
The Dow rose 719 points since the low that followed the disappointing job figures last week in the US and our market was up close to 100 points on Monday. So what’s going on? And how do we play it?
There are now more experts arguing that the Fed won’t raise interest rates this year. They say the US economy is not as strong as was thought and while unemployment at 5.1% says the labour market is doing all right, inflation is still too low for interest rate rises to proceed.
The market experts call it “risk on”, which effectively means stocks are going up and those who feel very positive argue that rates look to be lower for longer, so it makes stocks look like good value.
For how long?
But our question is — for how long? That determines how we play stocks. Do we buy ANZ and CBA now on the basis there’s more upside until US stock market influencers again start thinking that the Fed is close to its first rate rise?
Then we have to endure more volatility driven by the smart hedge fund managers, who would sell hard to push prices down and then buy when BHP is at $21 and CBA is at $70.15, like it did on Glencore Tuesday! Did you get in at that price?
Let me admit that I am a bit confused but it’s only a short-term thing. Long-term, I strongly believe the Fed will raise rates, the stock market will sell off, either just before or just after the rise, and then there’ll be a rally based on a US economy on the rise.
And lots of others, believe me. And that’s why the analysts have a target price on BHP of $27.29 and the sentiment indicator, according to FNArena, is 0.5 (1 is the highest and -1 is the lowest). It’s why ANZ, which is now $27.39, has a consensus target price of $32.75, again with a sentiment indicator of 0.5. Sure I’d like it to be 1 but these are uncertain times and there are a lot of analysts — paid professionals — who are saying that, on balance, these good companies are currently undervalued by a relatively spooked market.
De-spooking delay
When de-spooking happens, many of these target prices are likely to be hit, but it’s more likely to be post-November or December. And if the Fed waits until next year to raise rates, it could be even more delayed, however, we are in a long, drawn out economic cycle and therefore the stock market will be long and drawn out, provided economic stimulus packages lead to economic growth.
I don’t overreact to one month’s bad figures and there can even be deceptive quarters. For two years in a row, the US economy has been dragged down by a big freeze, which then saw data pick up later in the year. The Yanks got a 0.2% growth number for the March quarter, which was revised to — 0.7% but then they got a 3.9% outcome for the June quarter!
Economists are now calling it ‘frozenomics’ and it underlines how tricky economics can be. You can double that trickiness when it comes to understanding stocks short term, in particular.
My plan
My position remains that I will buy on the dips. I like the banks, BHP at $21-something and even ETFs, such as the SPDR S&P/ASX 200 (STW) because long term, I think the index will see 6000 or more but I could be disappointed in how long it takes. Then again, I could also get a pleasant surprise.
This is a stock-pickers market. That’s why I feature these sorts of people in this report and on my show, but one day, when the economic outlook and the profit future looks unambiguously good and interest rates are starting to rise, then market indexes will take off.
Eventually they will give in to a crash but that’s life on the stock market.
For now, I’m just playing a waiting game and going in for the kill, when I think I see great companies or ETFs at good value.
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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