How low can we go?
by Peter Switzer
The perfect storm has broken. The headwinds of the S&P ratings downgrade have collided with the vortex which the Euro-debt disaster has been and these have merged with the potential for a US double-dip recession.
And the result was a howling ill wind on Wall Street overnight resulting in the worst day for the stock market since 1 December 2008. The Dow was down 634.76 points, or 5.55 per cent, to 10,809.85. The S&P 500 gave up 79.92 points, or 6.66 per cent, to finish at 1119.46.
But have a look at the Nasdaq. It lost 174.72 points, or 6.9 per cent, and this contains some of the best businesses in the world. These are the hi-tech businesses such as Apple, Google, eBay, etc which will be the future of the US but they were trashed this morning!
The bounce back
This is irrational panic and while I don’t expect there will be a quick turnaround, there will be a bounce back.
Now before you say, 'yeah, yeah Switzer, you’re always beating an optimist’s drum' — let me make a few points.
Back in late April, I warned short-term investors that history says you sell in May and go away. But for the long-term investor you stay the course unless you want to punt and pick or time the markets’ ups and downs.
This isn’t easy as the greatest institutions in the world can’t pick these bad days, even with the smartest brains in the country. The Reserve Bank couldn’t see this happening or they would have cut interest rates last week. Nope, guessing the market is for expert traders who often lose, or mug punters.
I reckon the best takeaway from today’s scary market headlines was this: “The lowest close in 10 months”. So, less than a year ago we had rubbish results like this. Yep and it was linked to Euro-debt woes and the fear of a US double-dip recession. It’s Groundhog day!
Whatever factors have spooked investors, the bottom line says the US and Europe are heading for slower economic growth and possibly a recession. This means less production, less income, less profits and therefore lower share prices — that’s the end result of a worse-than-expected economy.
Where’s the market headed?
But what if they’re wrong in their guessing? What if they’re wrong about the bond problems being unresolvable in Europe and what if the US economy avoids a recession? Well, share prices will go up and that’s what I bet happens between sometime soon — it could take a month — and Christmas.
Ironically, the bad news has driven the oil price into the low US$80 a barrel range and that will actually help the US economy recover but they will have to manage the negative effects of the market dive.
Right now we’re in the hands of the guys — short-sellers and hedge fund managers — who wait for negative triggers like the ones we have now — Euro-debt, ratings downgrades and double dip predictions — but eventually good news will accumulate and we will start moving up.
The chief economist at RBS Morgans, Michael Knox, says based on what the great US company profits and what the S&P 500 earnings are telling him, the S&P 500 should be at above 1600 points.
He said in the last three months of this year we should “see a very strong quarter in the S&P 500”.
That’s rational analysis from an expert with a long-term view as opposed to the short-termers who are determining the market’s direction and level today.
By the way, S&P did make a $2-trillion dollar mistake in their debt-to-GDP calculation! Only in America.
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.
Published on: Tuesday, August 09, 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.