FYI | May 27 2015
By Peter Switzer, Switzer Super Report
The question is, as this stock market does not often deliver what we want, how should we play this frustrating market? Unquestionably you have to ask yourself the question: “Where is this market heading?”
The drivers
And the next question has to be: “What are going to be the key drivers that will determine my returns over the next couple of years?”
I purposely say “a couple of years” because I am certain we have, at least two good years investing in stocks, despite expected corrections. In all likelihood it could be four years left but I would never write that! Oops!
On the ‘where are we heading’ issue, let me use history to give it to you in numbers. First we take 6000 this year and then we head towards 6800. That should mean we have followed the historical script that we take out the old all-time high before we create a new all-time high before giving into another market crash.
We finished Friday at 5644.7, so to 6000, that’s a 6.3% rise — which is not hard to believe. The next stop is 6800, which suggests a 20% gain! Why wouldn’t you be in stocks with that possibility beckoning?
But given that history says we should go even higher, playing stocks looks like a gift, especially given where term deposits are.
So, on our best guess basis, that’s where we are heading but what about the strategies? To get these right, we need to ask: what do we expect to happen?
The playbook
I suggest the following:
• Our dollar falls to the low 70s but some economists say we’ll eventually see a 60-something exchange rate against the US dollar!
• The greenback rises on the Fed’s interest rate increase, probably later this year.
• The stock market falls as Wall Street deals with the belief that the Fed is about to raise rates.
• Our market follows suit but it creates even more opportunity for the courageous or smart.
• Wall Street resumes its upward march based on an economy strong enough to need rate rises.
• The European economy gets better, thanks to QE.
• Japan gets better because of its QE.
• Our economy starts to grow faster in 2016 and optimism starts to takeover from pessimism as the dollar falls.
• China performs better than many negative types expect, but both oil and iron ore prices remain at non-elevated levels, compared to the past, which actually should be good for economic growth and inflation.
What I have described above is the blow by blow explanation for what looks like a slow, long grinding out economic recovery worldwide, which will underpin a long, drawn out bull market, where the returns will be OK but nothing all that flash.
That said, the low interest rates, thanks to QE and loose money programs of central banks right around the world, will keep term deposits and bonds yields, though higher, not at levels great enough to make us want to dump stocks.
The strategy
So, your strategy to make money in this market is to buy the quality companies that pay dividends in good times and bad. And the best time to buy them is when the market takes a dislike to them.
So if you want some guidance on what might lie ahead, have a look at Ron Bewley’s 12-month forecast for the sectors.
Let’s take our favourites — financials — and the insider analysts that Ron surveys say they will yield 5.4% and they expect a 9% gain on share prices for a total return of 14.4%. That’s their best guess while energy looks like it will go ballistic.
That one worries me a little, but there are some optimistic oil price forecasts out there. I’m still a bit suspicious of that big call on energy for the year ahead but it does suggest that the sector should do better than over the past year.
Still the most important point is that the analysts of the broking and funds management world see our stock market delivering a nice 15.5% return — 4.5% yield plus 11% capital gain!
That’s not bad and given I’d be happy with a 10% return from stocks, I pose the question: “What are you frustrated about?”
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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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