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Expect the unexpected

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by Peter Switzer

One thing I’ve learnt watching and commenting on stock markets and economies for over 25 years is that you have to expect the unexpected. And another lesson is to not get too excited by oddities such as the rise in the US dollar overnight or the fact that good corporate results are not triggering another spurt of buying on Wall Street.

It’s better to focus on the good development that will have a bigger impact on the longer-term trend for the market.

Let’s face it, the Aussie stock market has put on over 50 per cent since the March lows and some of this rise was based on the expectation a few months ago that the US recession would be pronounced as dead and buried, and these corporate results would come in better than expected.

The Dow Jones 100-point fall came despite some good economic news, which I think will become increasingly important, and once again some impressive corporate reporting.

It’s all connected

To put the overall story into context, the euro is seen to be overvalued given the strength of the eurozone. That leads to a weaker euro, which helps the greenback. This then puts downward pressure on commodities such as oil and gold, which are priced in US dollars. These lower prices bring related share prices down from $US81 to $US79 a barrel and gold has dived to $1,039 after being around $20 higher yesterday.

Consumers are back

Meanwhile, companies such as Verizon, Radio Shack and Corning all beat earnings expectations and these are companies that are close to US consumers. This comes as more and more experts are seeing a comeback of the American shopper and that’s something many weren’t prepared to predict six months ago.

Lawrence Glazer, managing director at Mayflower Advisors, can see it developing.

“The consumer is back and beginning to participate in the economy,” he told CNBC. “In the short run, that’s driven by policies for stimulus, cash for clunkers, homebuyer credit and that’s positive going into the all-important retail holiday season."

And he offered the point of view all long-term investors should focus on.

"In the long run, we do need to see unemployment come down and energy prices stay in check for consumers to continue to participate — and those headwinds do remain, longer-term.”

More hiring, more investing

Of course this is still speculation, but the signs are looking better and there was some measurable good economic news worth reporting.

A survey from the National Association for Business Economics found US companies say they will hire more and invest more over the next six months.

The GDP result wait

Economics, as I wrote yesterday, will become the main game and there will be some big news for us when we wake on Friday morning as the Yanks will get their September quarter GDP results. If the number is better than 3.3 per cent, then it could get Wall Street excited. By the way, this will be the 80th anniversary of 1929 market crash!

As an optimist, I am sweating on a better than expected GDP result but that is a big call.

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, October 27, 2009