FYI | Sep 17 2019
By Peter Switzer, Switzer Super Report
Are the doomsday merchants right? Is a market sell off nigh?
The local stock market is up 3% over the past month and over 20% before adding dividends for the year-to-date. And while the positive Trump trade tweets are helping the stock market head higher, the question has to be asked: “Are the doomsday merchants right and is a market sell off nigh?”
The main game for our market is what happens in the US and Wall Street, so my analysis on whether we should cash up and run away from stocks will be based on assessing the US situation.
Back in August last year, the US money website partners4prosperity.com (p4p.coma) pondered whether: “Is now the time to go to cash?” And they said “7 signs point to Yes!”
This chart shows that these guys were on the money until December 22:
Reason one for their negative call was an increase in stock market volatility and something called the Smart Flow Index was saying “be careful”. “The SMFI is a leading indicator that analyses market patterns in an attempt to discern when the “smart money” is selling. It has correctly predicted previous stock corrections and crashes…” the team at partners4prosperity.com explained.
That said, there are those who argue that it’s not as reliable as some would argue.
“The problem with this indicator is that it’s based on the assumption that amateurs only trade the open, while professionals only trade the close. Essentially it looks at when people trade vs. something more tangible. People are just enticed by the name of the indicator but fail to look under the hood,” explained Arun Chopra of CFA CMT.
“Technicals are helpful but there’s a lot of ridiculous names for indicators out there like the Death Cross or the Hindenburg Omen that people just take at face value.”
The second reason for fearing stocks was that the stock market had stalled. That’s not a factor right now but I will revisit this warning sign if the October trade talks fail to deliver for the optimists, who are growing in number.
The third worrying factor for stocks was the fact that interest rates were climbing. Interest rate rises are the prime killer of bull markets and back in August rates were on the rise. In fact, three hikes were expected for 2019 around August of last year.
However, rates are on the slide and we should see another from the Federal Reserve this week, so this is another bad boogie factor we can rule out for stocks!
Number four concerns the “debt is rising” issue, which clearly remains a problem both for the US Government and the US household.
On US public debt, this is what The New York Times told us in late August: “The federal budget deficit is growing faster than expected as President Trump’s spending and tax cut policies force the United States to borrow increasing sums of money. The deficit — the gap between what the government takes in through taxes and other sources of revenue and what it spends — will reach $960 billion for the 2019 fiscal year, which ends September 30. That gap will widen to $1 trillion for the 2020 fiscal year, the Congressional Budget Office said in updated forecasts released on Wednesday.”
But wait there’s more.
The 2019 deficit is projected to be 25% larger than it was in 2018, and the budget office predicts it will continue to rise every year through 2023.
This clearly is a big risk issue and could be a reason for the US President starting to show a more accommodating side to his trade talks.
Issue five was “Bonds are losing value.” This happens when interest rates are rising. As they are falling now, it actually increases bond prices so existing bonds are more valuable.
On this point, the mob at p4p.com looked at the inverted yield curve, which they underlined as a harbinger of a recession. But right now, the inversion is reversing, so we can cautiously rule this one out as being something to fear.
That said, this could turn on a dime, if trade talks get ugly again.
The sixth concern was linked to this question: “Is real estate peaking?” This was the take on the US property market a few months ago: “After six years of strong house price growth, the U.S. housing market is now cooling. House price rises are decelerating gradually. Demand and construction activity are falling, amidst rising interest rates. Homebuilder sentiment is also at its lowest in more than three years.”
That said, this chart is not blinking a red warning light and falling interest rates (like here in Australia) are likely to arrest any early declines for property prices.
The final fear factor was contained in this headline: “The wealthy are seeking financial safe havens.” This is what CNBC found at the time: “The latest CNBC Millionaire survey, conducted in April by the Spectrem Group found that investors with one million or more in assets are more likely to increase their short-term holdings—cash, CDs, fixed income, treasury bills, money market accounts, and savings accounts—rather than equities this year. Additionally, 35% of millionaires age 55 and under and 37% of investors with $5 million or more are likely to increase their fixed income holdings.”
The May 2019 take on stocks from these 750 millionaires, who are regularly surveyed, came out as: “Americans with $1 million or more in investable assets are bullish on stocks and the economy for the duration of 2019, according to the latest CNBC Millionaire survey, which was conducted in May across 750 affluent individuals. The market sentiment of the wealthy has improved since the last time CNBC’s biannual survey of millionaires was conducted in fall 2018.”
The market has gone up since late May, albeit not by much, but there has been a lot of argy-bargy on the trade talk front since. However, there are no signs that US investors are turning tails and running from stocks.
A positive sign is that stocks that were chased when trade talks turned bad are now on the outer as value-type stocks and fund managers are now finding friends!
So if I add up the seven, I make it five-two in favour of staying in stocks and avoiding cash.
The stock market is not stalling, interest rates are not rising, bonds aren’t losing value, real estate is not tanking and the wealthy in the US are not running away from stocks to term deposits.
Against that, volatility is high-ish and debt is increasing.
I maintain Donald Trump and his trade dealings could change all that, so watch this space. If I change my mind, you’ll be the first to know.
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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