FYI | Jun 29 2016
By Peter Switzer, Switzer Super Report
I’d love to start this communiqué to all of our subscribers by evoking the sentiment of Franklin D. Roosevelt, who once told Americans during the Great Depression, that the “only thing we have to fear is fear itself”. It’s a great line but I know retirees and wealth-builders hate their capital being undermined and it takes a very special investor, who can arrange his or her investments so that market slumps don’t really create fear and loathing.
You all know me and I am always see a buying opportunity when markets tank because I don’t think this secular bull market is over, yet. Some of my expert colleagues like Gary Stone from Share Wealth Systems argue we are in a cyclical or short-term bear market inside a much longer-term secular bull market. I think he’s on to something there as it’s consistent with my economic view that we are in a long, slow, grinding higher global economic recovery, which the stock market will mirror.
Historically, low interest rates are a great boon to stocks but we need an economic take-off to power markets higher. Without it there is bound to be slow rising markets but if the economic promise from quantitative easing fails to show up, then recessions worldwide will kill this bull market.
I have been a believer that the economy worldwide would eventually come good and that’s why I was bullish on stocks.
Now that was my strong point of view until Friday, bloody Friday when the Poms gave vent to their Eurotrash hate. Of course, it wasn’t deep-seated because only 51.9% of the Brits wanted to leave but it was enough to rattle stock markets.
This was Friday’s wash up and it does not make pretty reading but there could be an odd silver lining in these dark Euro-clouds. This is how stock markets copped it:
- German DAX down 6.82%.
- French CAC down 8.04%.
- Spanish IBEX down a huge 12.35%.
- The Brit’s FTSE only down 3.15%.
- Our ASX 200 off only 3.17%; and
- The Dow Jones only gave up 3.39%.
The more muted responses by the Anglo-Saxon countries’ markets is heartening and could be telling us something about the seriousness of the Brexit but these are still early days. I don’t know how scary this will be but we should know by Friday.
This is a perfect scenario for hedge funds and other short sellers, so they could easily ramp up the fear and loathing this week but the real issue will be just how bad Brexit will be for the global economy. If the EU’s confidence — consumer and business — is rattled by this and political opportunists, who join into this rebellious behavior from Britain, then we are in unchartered waters.
Knock on effects, such as the yen spiking because of Brexit, could derail Japan’s slim hopes of economic recovery and as the world’s third biggest economy, this isn’t good news. Also, the IMF has predicted a UK recession linked to Brexit and this is the world’s fifth biggest economy and so this isn’t great for the overall global economy. It may even alter my optimistic view that the world economy slowly grows to higher levels and that then has to affect my views on where stocks go. Hopefully, by end of this week, I will crystallize my thoughts on what happens to the global economy and then our economy and then our stock market. But wait, there’s something really important I need to share with you.
At the start of 2006, the S&P/ASX 200 index was at 4774.80 and closed at end of 2015 at 5295. So that means that even with a 50% shakeout of the stock market with the GFC and the collapse of the mining boom, stocks have risen about 11% overall or 1% a year plus dividends of 5% and franking credits of say 1% (to be conservative), to give a total per annum return of 7%.
This is an outlier, underperformance for stocks and I’ll show you why.
In his great book, Bulls, Bears & a Croupier, Matt Kidman looked at the stocks statistics work of share market historian Ashley Owen. And this is what he found:
- Over 1200 10-year periods, the stock market has not had a negative absolute return.
- Between 1883 and 2010, the market has gone up seven out of every 10 years.
- There were only 28 negative return years between 1883 and 2010.
- Kidman, who was the trusted lieutenant of WAM’s Geoff Wilson made this memorable observation, which everyone investing in stocks should know: “On average, over the last 127 years, the share market has delivered annual returns of approximately 10.5% (when capital gains and dividends are taken into account.)
And by the way, history shows half the gain you make when you look at the returns from being in shares comes from dividends.
So if you portfolio of stocks can give you say 6-7% yield and you add in franking credits, you should be able to cop market slumps because your dividends won’t slide as fast as the stock market. In fact, they can be very resilient.
I don’t like the impact of Brexit on the EU that was starting to show a little bit of promise and those European stock market responses could be a sign that the economic effects on Europe could be a lot worse than I’m hoping for. It also could be an overreaction on the basis that you sell first and ask questions later when a big market snowball is thrown into your complacent face.
That said I think a buying opportunity will again emerge and my job ahead is to tell you when. Watch this space.
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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