I have used this introduction before, but because of its uniqueness – and as I suspect much of Professional Planner’s audience might appreciate this point of view – I have decided to run with this opening piece again. Here goes. You can’t easily live without the work of journalists – but sometimes they write some crap! A recent example came from the US, where they suggested that a 150-year jail sentence handed down to Bernie Madoff for his Ponzi scheme somehow sparked a 90-point rally on Wall Street.
The reality is that most investors are torn between not wanting to miss out on the start of a bull market and a fear of getting into the market just as it sells off again. At the time of writing, the US S&P 500 was up about 37 per cent since the stockmarket’s March lows and our local S&P/ASX 200 index was up about 24 per cent. I recently interviewed Martin Lakos from Macquarie Private Wealth on my program, “Switzer”, on Sky News Business Channel, and he suggested that a severe pullback was less on the cards now. On the same show I talked with Paul Fiani, of Integrity Investment Management, who became famous for saying “no” to the Qantas buy-out when he was at UBS. Fiani also believes that the chances of a significant pullback are less likely.
His reasoning is that investors would be getting 3 to 4 per cent on cash at a bank, but with the market’s dividend yield delivering around 6 per cent plus, there’s capital gain in the offing. This should underpin the support for shares. A recent survey of equity analysts by the Australian Financial Review found that on average they expect the S&P/ASX 200 to make it to 4800 by June 30 next year. That’s nearly 1000 points in a year! And Damien Boey from Credit Suisse is really bullish, tipping the market index to hit 5500. Ron Bewley, the chief investment officer, private client services, at the CBA, and a professor of quantitative analysis, supports this kind of thinking. When talking to me on my program, he pointed out that the rebounds after a bear market that turn into a bull market historically are quite dramatic. You don’t have to be Warren Buffett to work out that Wall Street is calling the tune for our stockmarket, and that the Yanks are reacting to the flow of economic news.
This has remained heavily biased to the positive; but these figures will take a back-row seat to profit results and particularly the outlook statements. These have to reinforce the idea that “green shoots” are not withering but are starting to grow into plants and branches. Thankfully, US leading economic indicators have turned positive, manufacturing reports are getting better, the stockmarkets are up very strongly and technical experts say their charts are pointing to an end of the downtrend. But the biggest driver is the growing belief that the US will show a stronger-than-once-expected economic recovery. This is a strong incentive for investors to buy now, ahead of the economic reality. There’s even good news from Europe. The euro zone’s economic sentiment index went up again, and that is the third rise in a row! Against all of this, there are those who say this past market surge is a bear market rally and it is nearly over. I am sorry to expose you to this minority negative view, but you must invest with your eyes open. One of my bearish buddies is a guy called Lance Lai from Accountancy Invest. Lai argues that the best indicator of whether a bear market is over is the 200-day moving average.
He says this must be crossed quite a number of times to turn a downward pointing trend into an upward pointing one. When I talked to him, there had only been three crossings of the moving average, which he said was too few. Against this, I would argue that we have lived through extraordinary times where the market fell 50 per cent; and that means, to get back to where we started, we need to rebound 100 per cent. That really puts our 24 per cent comeback into perspective. In a sense, we had a crash before Lehman Brothers was allowed to fail. After this, we danced with a depression scenario; and it looks like we have skated close to the brink and made it, but only just.
I think the arguments above put the article you are now reading above the “crap” classification. The big danger is an X-factor we can’t see, which could change investor thinking. The short-term investor always has more to worry about, as he or she can make or break a fortune with a bad decision. The long-term investor, who focuses on five years out, will one day look back at these index levels and these share prices and recall what a buying opportunity it was. As advisers, you know this happy ending could easily come with some scary sell-offs and some sideways trading, but in the end the upward trend will prevail. This is what we have to convey to our clients, and hopefully they will believe it.