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How long does a rally last?

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by Peter Switzer

After a pretty substantial fall on Wall Street overnight, just after a big rise during the trading day before, the question has to be asked — how long does a rally last? In this market, the answer can be one day but the real question for the long-term investor is, should we remain in stocks or simply take six per cent or seven per cent on offer in term deposits?

If this sideways movement, with some days of significant rises and then equally significant falls then prevails, are we patsies waiting for the so-called next shoe to drop?

And even more relevantly, how long can we go before something is done to insure against a repeat of 2008 when many share portfolios lost over 50 per cent?

Anton Tagliaferro, the founder of Investors Mutual is not super positive about the near future. He thinks there’s a lot wrong with Europe and the US and so he’s setting a goal to make 10 to 12 per cent from his stock picking. In a sense, a tough market is good for a ‘master of the market’, which he was once called in a book of the same name.

Tricky tides

Once the debt and economic question marks are behind us, anyone who wants to make money the easy way could just buy an ETF for the S&P/ASX 200 index. As the old saying goes: “A rising tide lifts all boats”.

However, right now the tides are tricky, dominated by rips and undertows and so you either have to play the waiting game or sit in cash until the worst of this market is over and there’s no more economic anxiety.

Floor under the market

For those worrying about another GFC-style collapse of share prices Anton can’t say it won’t happen but he made a great point after he got off screen from my Sky News Business Channel program. He made the point: “A collapse usually comes when you don’t expect it but right now there are a lot of people expecting it”.

So in a sense, the cautious going to cash are putting a floor under the market by not contributing to irrational expectations that sets markets up for crashes.

Market bounce

So how do you make money in the shorter-term? Well, regular readers know I have been advocating blue chip companies that pay great dividends. If you average a four per cent return on your shares, and you can do better, you’re not far from the six per cent you can get from a one-year term deposit. Then you have to hope that you can make three per cent from the rise in share prices to beat the safe option.

Of course, if you went for the seven per cent term deposit for a five-year tie up then you would definitely miss the market big bounce, which is likely over the next two to three years.

Help in the short-term

So what might help the market in the shorter term?

Well, how about more fiscal spending in the US?

That’s what Nobel Prize winning and Princeton economics professor, Paul Krugman, recommends.

The Yanks earmarked US$800 billion for stimulus.

The investment component of this was around US$250 billion but less than half of this has been spent! And that’s after 18 months since the spending bill was passed.

He thinks the package was also too small to be a big help. In Australia, in the March quarter, we grew by 0.5 per cent but 70 per cent of this came from government spending!

In the US, government spending has become a negative on the overall growth rate.

Krugman says the US bond markets, which are oversubscribed and is pushing interest rates or yields down to very low levels, are warning that the US economy is in line for very slow growth and even deflation.

“The economic data makes the case for more stimulus,” he told CNBC.

He wants another US$800 billion and fast. He wants money spent on infrastructure but also would like to see it get through to US consumers, who will spend it.

I suspect we will see more US Government spending and the mid-term elections could also kick in to help the makings of an end-of-year rally.

One thing is for certain, something does0 need to be done and the quicker the better.

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, August 31, 2010