Business News

Down again, but for how long?

| More

by Peter Switzer

With Wall Street down again, the essential question is just how scared should we be about this stock selling? And if we shouldn’t be too spooked, well, when should we get in to ensure we cash in on this possible buying opportunity?

Dow down

In case you need a recap, here are the reasons why the Dow is down over three per cent this May and why it lost a small 0.2 per cent to 12,356.12 overnight:

Most importantly, the uncertainty over European debt of governments first and the impact on banks who lent to them next
An apparent slowdown in the US economic recovery
US Congress fights over the deficit and debt ceilings for the US government
The end of QE2 at the end of June
The troubles in Libya and the Middle East with its implications on oil
A possible slowdown in China and Asia, as inflation threats lead to more restrictive policies such as higher interest rates.

Of these many concerns, only the euro-debt issue really worries me as it could be an X-factor that we don’t understand and that could rock the market. Mind you, because the survival of the EU and the euro is riding on the management of this debt problem, I suspect the best efforts will be made to minimise the damage from a debtor nation behaving badly. However, as they say in US political thrillers — “the situation is still fluid".

Switzer’s take

On the other matters, this is my take:

The Yanks will come to an agreement at the 11^th hour on the deficit and the debt ceiling.
QE2 will end but Bernanke won’t rush to raise interest rates until the economy is really doing well. Also, 2012 is an election year and so the rises will be small and measured not to rock the confidence of businesses and voters.
The US economy is slowing down but not disastrously. A recent CNBC survey of economists found that the consensus says that while in April the economic growth forecast was 3.07 per cent, it has now been cut back to 2.7 per cent. This would reflect the likely effects of the end of QE2 and eventual interest rate rises over the next 12 months.
On the S&P 500 forecast for December, it went from an expected 1360-level by June to 1330. Meanwhile, for December, the forecast has gone from 1406 to 1367. Note the S&P 500 is now at 1316.28 and so that implies a four per cent rise by year’s end.
I expect to see a higher US dollar and a lower Oz dollar, which should help our stocks perform better than Wall Street.
On China and Asia, I expect a small slowdown and that could take the heat out of inflation and reduce the chances of oil going too high. And on that subject, a number of US investment banks upgraded the outlook for oil, which I think is a positive for global growth.
Finally, a resolution in Libya and the Middle East would be the icing on the cake for the market optimist. Once again, this is a potential X-factor that could rock the market but I suspect the matters will be sorted out not to derail the global recovery.

Market to head higher?

So, as you can see, there are good reasons why investors should be scared right now but not sufficient reasons to cash in all of their chips to run away from the stock market.

I think the market will head up more confidently in the last three months of the year but until then it will be choppy but the trend will go from the current downward one to that of a gentler upward slope.

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.

Watch more from Peter on SWITZER TV.

Published on: Wednesday, May 25, 2011

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

When do we dump stocks?

Abbott’s budget reply: is he really trapped?

Budget 2013: what are the real issues?

Labor’s trap for Tony Abbott

Call me irresponsible - should this be Swan's Budget song?