Having Hit 6000, Where To Next?

FYI | Nov 15 2017

By Peter Switzer, Switzer Super Report

It’s great that we’ve finally cracked the 6000-mark on the S&P/ASX 200 Index and I have to say that I was copping a little bit of heat from some of my ‘fans’ and even my colleagues, with some arguing I should let the 6000-number go.

It made sense, public relations wise, to do a Basil Fawlty and not mention the “war,” I mean, the 6000-number, but I just couldn’t let it go.

The overall Aussie story and the history of stocks told me that 6000 had to happen and that 6800 is likely to be next. As I pointed out on Saturday, Credit Suisse equity strategist Hasan Tevfik, told the SMH that “while Aussie equities are due for a pause in the short-term, we think there is more bull to come and we’re targeting an index level of 6500 by end 2018.”

I think we will see it at 6800 by end of 2018 provided no easy to miss ‘black swan’ comes along to upset world economies and global stock markets.

All of the seeable stuff for the past year or so and into the future all scream that being long stocks still makes sense.

Let’s do a bit of recent history to work out what might happen going forward given we have cracked the 6000-mark.

We just about got to 6000 in March 2015 and then market forces and a weakening economy as the mining boom faltered took the Index from 5995 down to 4765 by 8 February 2016. At the time I was telling you that there was no real rhyme nor reason for the excessive market negativity given my views on world growth, our improving growth outlook and the very cheapness of our market. Many of you would have recalled me using the “buying opportunity” argument from when the Index dropped below 5000 but let’s assume you believed me and bought an ASX 200 ETF at ,000 and then temporarily hated me when it dropped to 4765!

Let’s see how you might have done. On capital gain terms you would have made 20% plus lets say 10% on dividends, which rounds out to 30% for under 22 months. I think this story reinforces my regular arguments that you buy quality assets when the market seemingly is unnecessarily negative.

We’ve seen this lately with CBA shares which dropped to around $73 in September when the bank was in more trouble than Nick Kyrgios, but now it’s at $80, meaning there has been over a 10% return for believing in a quality asset.

I would argue that the current improvement in the stock market links to a greater belief in a better Oz economy in 2018. This implies stronger company profits and this is likely to happen with the dollar falling as the Yanks raise interest rates and it also lines up with increasingly more economists expecting wage rises to resume in a more healthy way next year.

It also lines up with the surprise quick comeback of commodity prices and the defiant strength of the Chinese economy and the unexpected bounce back of the European economy.

It makes perfect sense to believe that this rally has legs even if, as per usual, the stock market does not rise in a straight line. I would expect a sell-off if the Senate Republicans screw up the Trump tax cuts by saying no to some important parts for Wall Street or if it’s delayed for a year, as some reports suggest is possible!

That said, I believe the “stocks go higher” story still rings true for 2018.

You might worry about the US stock market which is in and around record territory but as CNBC reported: “Investors poured a record $US1.3 billion into funds managing tech shares over the past week.”

This is despite a near 40% rise in tech stocks this year, though this is a reason for me to believe that a correction for these stocks would not be surprising.

But could it get more serious? The same CNBC report did argue that “a meltdown would require a recession risk or moves higher in wage inflation, bond yields, and volatility or credit spreads.”

These are not expected in 2018 and might have to wait for 2019 or the 2020s to show up.

Investment bank Piper Jaffray in the US has backed the bull run for some time and isn’t changing its mind yet.

“We see a favorable backdrop for US equities as market fundamentals suggest the path of least resistance remains higher,” strategists Craig Johnson and Adam Turnquist said in a year-ahead preview released Wednesday. “We believe the growth story will continue to drive price action and cut through the day-to-day noise.”

It tips the S&P 500 Index at 2,850 for the end of 2018, which points to a 10% gain. If they’re right and our dollar drops to say 70-72 US cents or even lower as some economists expect, then we will have both a Wall Street and an exchange rate boost to our stock prices. So, I say hello 6,800 for 2018.

Piper Jaffray points to low interest rates, a pro-business political environment — US stocks are up 30% since Donald became President! — the health of transport stocks re Dow industrial stocks and the technical factors that chartists like, to get excited about.

The economic/market fundamentalists and the chartists are seeing similar rosy pictures for 2018 and I’m buying those stories.

Piper Jaffray, like yours truly, has consistently believed in stocks since 2009 and has been largely right for US investors. I did get into this game in November 2008 and so I did worry a little until March 2009, when stocks took off but it has been a rewarding play, albeit a slower one for us than the Yanks have enjoyed.

Sure, a correction is overdue in the States after 60 weeks without a 2% correction but the Piper Jaffray team has an interesting statistic on this concern.

They explain that “in the six other instances where the market went more than 50 weeks without falling 2 percent, when the decline did come it was most often followed by gains — average returns of 12 percent over the next 52-week period.” (CNBC)

Because I like the economic outlook for 2018, I’m not going to get you worried about stocks until the yield curve inverts, so short-term interest rates are higher than long-term rates. This is how Investopedia explains it if you haven’t gone onto long economics: “Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall.”

The respected US fund manager, David Tepper of Appaloosa Management, is on a unity ticket with me.

“Any comparisons to past overheated markets are ridiculous,” he told CNBC. “Look at where multiples and rates were in 1999. I’m not saying stocks are screaming cheap, but you’re nowhere near an overheated market.”

The S&P 500’s forward P/E is at 17.4 which dwarfs the long-term average of 15.4 but Tepper, like yours truly, argues that we have never seen interest rates so low and that’s why we can live with higher P/Es.

The only damn thing that could make a monkey out of Tepper and me is a ‘black swan’, which I can’t help thinking about every time I drive through Albert Park in Melbourne — there’s a colony of the things there! They’re lovely creatures but given what I do every day, I can’t help but get spooked by them!

That said, onward and upwards remains a good call for stocks in 2018.

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.

Content included in this article is not by association the view of FNArena (see our disclaimer).

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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