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Data, not gut feeling

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by Peter Switzer

History has often shown me that it seldom pays to ignore your gut feelings when it comes to judging people but I have reservations about using the same assessment process when it comes to markets and making money. I prefer hard economic and corporate data and on that basis all long-term investors should be buyers on the stock market now.

Earnings higher

This was confirmed by the chief economist for RBS Morgans, Michael Knox, when I interviewed him on my program SWITZER on the Sky News Business Channel.

“The market is basically cheap,” he told me. “Taking the S&P 500 in the USA, with just over 60 per cent of companies reporting, earnings have come in 70 cents better than they were anticipated a month ago.” (This 70 cents figure represents the averaging of the earnings per share results from these companies, which have come in much better than expected.)

He then said first quarter earnings this year are also expected to rise and if you compare to where bond yields are, that puts the S&P 500 at 1250! So based on where the US index is now, that’s an 18 per cent expected gain ahead.

US dollar drop

At the same time he predicted that the euro against the US dollar, which is at its lowest level ever, is about at its low and in a few weeks will start to climb, pushing the US dollar down and that will help commodities and share prices.

Follow Wall St

Taking that to here in Australia, Knox says fair value for the S&P/ASX 200 is about 4870. We are now at 4521 and so nice rises lie ahead after this period of correction.

He thinks earnings will be better than expected and by April the index will be over 5000 and then, over the course of the year, it heads towards 5700, so we’re talking bulls big time here.

In addition, Knox argues that Wall Street leads our local market and consequently tips that the S&P 500 rises to 1300 this year.

Sovereign debt issues

But hang on, what about the sovereign debt problems with the PIGS — Portugal, Italy, Greece and Spain — that has ‘spookified’ the market?

Knox referred to a great book on sovereign debt failures by Carmen M. Reinhart and Kenneth Rogoff with the fantastic title This Time is Different: Eight Centuries of Financial Folly. History says countries default on their debt and Russia did it in 1998 and the stock market still went up. And in the 1970s Britain went to the IMF for help and Greece could do this.

He thinks fundamentals will win through and the current belting the markets are copping will give way to what the numbers say and not what panicky gut feelings tell investors when confronted with the unknown, such as sovereign debt and the PIGS.

For advice you can trust, contact Switzer Financial Services.

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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Published on: Tuesday, February 09, 2010