FYI | Dec 13 2017
By Peter Switzer, Switzer Super Report
I'm a believer in stocks for 2018 — here's why
This has to be another good year for stocks and I’m betting 2018 will top 2017. And I’m not monkeying around in forthrightly arguing that “I’m a believer” and I couldn’t leave this market, if I tried (to rely on the wisdom of The Monkees!).
We started the year at 5773.2 on the S&P/ASX 200, which means we’re up 4.5%. With dividends, let’s call it 9%. And if Santa rolls into town in New York, you can bet the Wall Street rally will push us higher too.
But the short-term is not my preoccupation. No, I’m focused on the longer term, where I think we have two years left in this long bull market to make money. Next year holds no fears and any sell-offs, which I expect we’ll see, will be more buying opportunities for the ‘true believers’.
Why two years?
Morgan’s chief economist, Michael Knox, has done his homework on when US recessions show up. The history says that when the short-term bond rates of interest are higher than long-term rates, meaning the yield curve is inverted, it’s a warning that a recession is on the way.
He told me last Monday that it usually takes eight quarters for a recession to show up after the yield curve inverts or goes negative. Right now, the slope of the curve is upward or positive sloping.
However, between this week’s Fed meeting and the one in a year’s time, there could be four rate rises, which could, and I say could, result in short-term rates topping long-term rates.
So, if you add eight quarters, or two years, on to the end of 2018, we have the end of 2020, which is why I’m very comfortable for stocks in 2018. That goes double for us where our economy is improving and the global economic outlook has been marked up by the likes of IMF, while Goldman Sachs is giving the US economy a big thumbs up for the year ahead.
I reckon 2019 will be more volatile but I suspect Wall Street will still be climbing higher, albeit at a slower rate. But even the so-called ‘supreme optimist,’ yours truly, will be wary about 2020. Knox says there was a time when years ending in zero or thereabouts, delivered recessions but I can’t cope with such numerology!
Of course, a black swan missile from North Korea could upset my bond rates theory on when the next recession shows up. But if you accept that these pesky critters, by definition, can’t be foreseen, then I’m comfortable with my stocks call for next year. Very comfortable.
And given the outside world is not tipped to upset my “she will be apples” cart, then what about any local problems that could cause a big mess?
Local issues
Ruling out Canberra and its fight with foreigners in the Parliament, which the business community seems to be wisely ignoring, then we’re left with the outlook for the economy. While economists are split between optimists and cautiously positive — few are bluntly negative about 2018 — then I side with the RBA, which thinks we will grow above 3% over the year.
If this happens, jobs will be created, unemployment will fall, wages will rise and company profits will spike, stimulating better stock prices. Let me show you the recent run of economic data that shows there are so many readings that are record- highs, decade-highs, etc. that would make it inconceivable that 2018 will be a faster growing year than 2017.
Here, have a geek:
- Our 2.8% economic growth was the best in 15 months and it’s tipped to go higher.
- Unemployment in NSW is now at a 9-year low of 4.6%.
- Employment growth is the best in 12 years.
- Business conditions are at a decade-high.
- Business profits are at a record high and are up 26.9% over the year – the strongest gain in 15½ years.
- In trend terms, dwelling approvals rose for the 9th month straight.
- Townhouse approvals are at a 20-year high.
- Building inflation rose by 1.4% in the September quarter. The annual rate of construction inflation rose from 2.4% to 3.8% – an 8 ½-year high.
- The fourth estimate of investment in 2017/18 is $108.9 billion and is 1.6% higher than the fourth estimate for 2016/17 – the best result for a fourth estimate reading in five years. The upgrade in investment between the first and fourth estimates is 34.1% – the biggest upgrade in 12 years.
- On debt servicing — the ratio of net income on foreign debt to exports of goods and services – this stood at 6% in the September quarter, holding near the best levels in 36 years.
- Engineering construction activity increased by 3.2 points to an 11-year high of 64.1, supported by strong infrastructure-related spending. Any reading above 50 signifies expansion or growth.
- Job ads rose for the fifth time in six months in November to 172,395 ads – a 6-year high. Job ads are up 12.1% on a year ago.
- The Internet Vacancy Index rose by 0.5% to 82.7 in October 2017 in trend terms, after increasing by an upwardly revised 0.6% in September. The index has now risen for 12 consecutive months – the first time since March 2011. The index has increased by 8.4% over the year.
- According to the Federal Chamber of Automotive Industries (FCAI), new motor vehicle sales totaled 101,365 in November, up 2.5% on a year ago – the highest for a November month on record.
- On our trade surplus — the rolling 12-month surplus rose from $18.9 billion to a record $20.1 billion. Exports to China hit a record $102.29 billion in the year to October.
In the year to October, 56.9% of those aged 60-64 years and 12.7% of those aged 65 years and over were in the job market — both record highs. - Over the year to September, the proportion of occupied seats on domestic flights hit a 5½-year high of 78.4%.
- Over the past year, a record 1,347,400 tourists came to Australia from China, up 12.6% over the year.
- The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 0.6% in trend terms in October, after a 0.5% increase in September. Spending growth was the strongest in five months and above the long-term trend pace of 0.4%.
Fair dinkum
If this list of very good economic readings is not a precursor to a solid economic year next year, then I’ll hand in my economist card. And at long last, the media economic commentators are siding with me.
The AFR led with a story headlined: “Recovery looks here to stay.” Their breakout quote reinforced the economic link to company bottom lines with this: “Conditions for companies have reached their healthiest levels in more than a decade.”
And while admitting there is some bad news such as the weak consumer numbers for GDP in the September quarter, Fairfax’s Ross Gittins couldn’t ignore the really good news coming out of the job market.
“But an economy with such strong and sustained growth in full-time jobs simply can’t be seen as sickly,” he wrote this weekend in the SMH. “And precedent tells us that where employment goes, wages follow.”
I’ve been a believer in the 2018 story for the economy and stocks for some time, as regular readers have to know. And after all the above, I’m even a bigger believer!
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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