FYI | Sep 19 2017
By Peter Switzer, Switzer Super Report
How wise it it to expect the next move for stocks is up?
The wait between reporting seasons always gets you thinking about what, aside from company reports and outlook statements, will get stock markets going up or down? Obviously, it gets down to economic revelations and geopolitical developments.
Undoubtedly, the economic story remains crucial and if the perception wasn’t that the US economy wasn’t improving and that the Chinese economy is doing better than was expected, then I reckon we would’ve seen a few more sell offs and corrections, especially on Wall Street. And these would have hit us just as hard, as we don’t have great profit stories, our dollar is too high and our growth rate is OK and getting better but it’s not shooting any lights out.
On the geopolitical front, we have the North Korean missile madness and then President Donald Trump’s handling of the mess. However, we seem to be coping with this, market-wise, better than in any time since the GFC.
Meanwhile, we do have high anticipation that if Donald can get his tax reform package through the Congress, then we might have a politico-economic reason to believe stocks will head higher in the December quarter, which starts in 12 days’ time.
The chart below shows why I love most of the December quarter.
So if we can get through October without a market sell off or correction — a 10% drop — then I’ll get excited about stocks for the rest of the year and into 2018.
By the way, while October has historically been an eventful month for the USA, with the Great Depression’s Black Monday and the 1987 crash both happening in October, history shows September is a more negative month for US stock markets than October.
And the start of the crash of 2007-2008 actually started in October 2007 but it wasn’t until November when we realised we were in a “here we go again!” moment.
So it’s with this setting that I pose the question, nearly daily, how wise is it to expect that the move for stocks is up?
Fortunately, US investor psychology has moved on from the GFC and its recession.
“I think what’s very interesting at the moment is why equity markets are not really moving very much in response to what you might have expected to be events that would move the equity market a lot,” Eric Lonergan, fund manager at M&G, said on CNBC.
“My personal view is there’s something more profound occurring here, which is an underlying shift in risk preferences, which is actually largely about the memory of ’08 decaying.”
He argues that investors now “under-react” to a number of news events that added to volatility.
“So as we get further away from ’08, and the kind of permanent wolf-crying that there’s a recession around the corner (that) doesn’t actually occur, people’s risk perceptions are shifting.”
My interviewing of economists and fund managers makes me confident that the consensus is that a recession that could rock stocks is at least two years away but it easily could be more!
“I think there’s been a major shift in investor psychology. It has been about capital preservation, low volatility. People are now saying, ‘where am I going to get a return from?’,” Lonergan said.
He believes that there is “an element of fear of missing out” that’s explaining why there’s no quick move to get negative and then to sell.
Helping bulls like me is the low level of interest rates and investors’ desire to get returns on their investible funds, especially now the fear of another crash any time soon is less of a concern.
Adding merit to my argument that the next significant move for stocks will probably be up, is the latest American Association of Individual Investors sentiment survey. Let me sum up the findings on where investors think the market will go in the next six months:
- Investors who are bullish on stocks number 41.3%, against an average of 38.3%. That’s a 12% rise in one week!
- Those who say they are neutral number 36.7%, up 1.8%.
- The bears are at 22%, and that’s a 13.8% fall!
Adding the new post-GFC positivity of investors to their most recent spike in their six-month view on stocks makes you believe that only Kim Jong-un or Donald Trump are the potential flies in the ointment, and even then the reaction might be weak on the negative side.
However, if Mr Trump gets some tax plan passed, it’s bound to be a big stimulus to stocks. And given he and his Republican Party know they need a win soon or they’ll be decimated in next year’s mid-term elections, it might not be too silly to hope for a tax win for the President.
God knows he needs one.
This week gives us another window on the all-important state of the US economy, with the dot plot points that show the Fed members’ expectations about interest rates bound to be important for markets. By Thursday, we’ll have a good idea about whether the Fed thinks the US economy needs a rate rise in December. If they don’t, the stock market will have to weigh up the negatives of a worse-than-hoped-for view on the economy and the pluses of slower rate rises in the world’s biggest economy.
The market will look at the height of the dots for 2017 and 2018. If they come down, it could be bad news for confidence.
October is set to be challenging, with US economic data to be looked at closely, North Korea throwing curve ball missiles, some Chinese slowdowns in the recent data drop, concerns about US inflation not rising quickly enough and what the hurricane damage will do to US GDP growth in the short term.
Donald Trump remains the key player. How he handles his North Korean adversary will affect markets. How he deals with Congress and his own party over tax reform will also be a big market mover.
If Kim is handled, the Fed remains bullish on the US economy and Donald does something with tax, then stocks will rise and so will the greenback, taking our dollar down as the economic outlook for the Oz economy picks up.
This is the perfect providence storm for Aussie stocks. I suspect by the end of that very scary month of October, we should know if we’re in for a great festive period for stocks.
My surveying of fund managers tells me they expect to see 6000 on the S&P/ASX 200 by at least mid-2018, and the index climbs higher from there. However, I suspect these views rest on the more positive scenarios I’ve outlined coming to pass. Pray for positivity. I think we’ll get through but there are known unknowns that could rock October.
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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