FYI | Oct 15 2014
By Peter Switzer, Switzer Super Report
Stocks will fall, get ready to buy!
By Peter Switzer, founder and publisher of the Switzer Super Report
Key points
- US stocks have gone too high and fair value on the S&P 500 was around 1880.
- An overdue sell off or correction in the US is likely over the next few weeks.
- Janet Yellen wants the QE experiment to work and won’t raise rates until the US economy and stock market can take it.
Hold your breath and get ready for a challenging week on the stock market. A Wall Street finish with the S&P 500 breaching its 200-day moving average on Monday night is not the kind of finish a forever-optimist really wanted to see.
After Lance Lai, my TV chartist, beat me at tennis on the weekend, he looked at the charts and said get prepared for some selling!
Thankfully, I’m not always optimistic, despite what some may say of me. I’ve been sweating on the Yanks embracing reality, and the US going through an overdue sell off was high on my wish list.
The reasoning is pretty simple. First, US stock markets have gone too high. Based on market valuations, fair value on the S&P 500 was around 1880. Of course, these valuations make more sense when the Fed is acting more historically rational but these have been crazy times so traditional analysis counts for less nowadays.
However, QE3 will end soon and, sometime in 2015, interest rates will start to rise. Then normalcy will start to replace the weirdness that has prevailed on Wall Street.
Weirdness?
Well, try no correction for over three years. Try unbelievably low volatility. Try a lack of fear with the VIX index hovering around readings of 13 or lower.
Of course, we should be grateful for all this weirdness, which includes official interest rates around zero, as it has worked. The US economy is defying the doomsday merchants and is growing nicely and will continue to do so across 2015, driving the greenback up and our dollar down. All this will underpin an improving Oz economy — don’t believe the naysayers, who are too negative on the local economy.
Sure, I’d like the Abbott Government to give up on trying to repair the Budget deficit too quickly and instead concentrate on getting the economy growing more quickly but it’s hard getting politicians to think outside the square.
That said, the low dollar plus an improving economy will help our stock market play catch up with Wall Street.
Right now, the global negatives are curtailing US optimism so the overdue sell off or correction is likely over the next few weeks but I suspect upcoming company earnings in the States will work against this current negativity.
The bad news
And boy, there is some negativity out there.
Middle East and Ukraine hostilities aside, Europe is the real worry, with Germany finding it hard to beat the Eurozone slow down, on top of the Putin-created problems for over 6000 German businesses operating in Russia.
But there’s more bad news, with Reuters reporting a Lipper poll of 109 US-domiciled funds invested in European stocks, which showed net outflows of $329 million last week, the biggest weekly redemptions since mid August.
This followed respected German economic institutes reducing growth forecasts, tipping the German economy to grow by 1.3% in 2014 and 1.2% in 2015. These are not great numbers for the “strong man” of Europe.
Ironically, because of half-hearted central bank leadership in Europe – and the problems of integrating 18 economies of the Eurozone to achieve the fiscal outcomes needed to help Europe grow – this important economic region to the global economy is not achieving what the Yanks are. And it will be years before they do.
This is now hurting stock market confidence but it won’t be terminal and I expect a rebound before Christmas and a pretty good year for stocks in 2015.
Even today, ANZ’s CEO Mike Smith predicted no significant fallout from the Fed’s ending of QE3 and also pointed to Japan’s commitment to adding to liquidity along with even Europe, which will embark on a version of QE.
It’s hard to say how low our market will go but I’m concentrating on stocks that I wanted to buy two months ago that now look attractive.
Buy in gloom
I mentioned in Saturday’s report that a stock like Woolworths looks more attractive at $33, especially compared to its $37 plus price in June.
One final point to justify my optimism, not for now, but for later this year and rolling into 2015, is the fact that the Fed will not rush to raise rates. US analysts were surprised that the Fed minutes showed concern for the global outlook. This is unusual for Americans. They are very hometown-focused.
That said, Janet Yellen wants this QE experiment to work and she won’t raise rates until she knows the US economy and stock market can cop it.
This is great news for optimists and bulls.
One final piece of advice that has stood the test of stock market time — buy in gloom and sell in boom. Now is gloom time and that’s why I am thinking about buying sooner rather than later.
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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