Back to the future
by Peter Switzer
By then, our local corporate earnings will have been put on show, and more economic reports from the USA on the progress of the US recovery would have been revealed.
These revelations will have a big bearing on how the stock market reacts, but the analysts/expert consensus has totally changed direction. It’s all up now with some prepared to bet that there could be some sideways action mixed in with a pullback. However, those who say we could head back to the March lows are in a shrinking minority and even sight-challenged Freddy could see that we seem to building ourselves back to where we were before Lehman Brothers discovered that they weren’t too big to fail!
Better news breakdown
Let’s look at the collection of better news that supports the comeback in cyclical stocks, and the rejection of defensive, as stock markets surged higher and higher.
- Since early March the Dow is up 39 per cent, the S&P 500 is up 45 per cent, the Nasdaq 52 per cent and our own S&P/ASX 200 has put on 35 per cent.
- Three weeks ago the consensus was our market could be at 4,900 by mid-2010 but more analysts are becoming increasingly bullish.
- In the USA, the best performing Dow 30 stock in the USA for July was Caterpillar, which manufactures equipment for mining and construction. It rose 33 per cent.
- The worst performer in the Dow was McDonald's, losing five per cent. (This stock went up when most were falling last year.)
- GE copped a Goldman Sachs upgrade and could hold onto its capital financial arm.
- Bank Of America looks set to open a Chinese subsidiary.
- As of last Monday, 77 per cent of the 184 companies in the S&P 500 that have reported have beaten expectations, while the long-run average is only 61 per cent, according to Reuters.
- US financials, seen as basket cases, have reported much better than expected.
- 2010 earnings for US companies now expected to rise 25 per cent next year after falling 22 per cent in 2008 and forecasted to be off 11 per cent this year.
- US GDP in the June quarter contracted at an annual rate of one per cent while economists expected a 1.4 per cent fall.
At home our economic news continues to surprise on the positive side and this could be reflected in upcoming corporate earnings. Company profits projected months ago reflected a consensus view that the economy was heading for recession and that unemployment could peak at 8.5 per cent, but many economists are pulling this figure back.
The economy is looking so much better that we are now looking at interest rates rising, when two months ago most economists said rates had further to fall. Even inflation measures are saying that our economy has not gone into the shocking contraction tipped by many.
While plenty of experts think the markets have shot ahead of themselves, they are still below the post-Lehman collapse. I think we are working back towards where we were before something thought too big to fail, failed. When this happened the S&P 500 was around 1,200, while it’s now 987, and our S&P/ASX 200 was at about 4,900 against 4,244 now.
As you can see, we still have a long way to go to get back to the September 2008 market levels. It’s a go back to the future scenario.
However, as long as the news continues to be better than expected, aside from a correction or pullback of up to, say, 10 per cent, it should be onward and upward to those old levels.
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Published on: Monday, August 03, 2009blog comments powered by Disqus