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I had a dream

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by Peter Switzer

On Martin Luther King, Jr. Day, which is a public holiday in the USA, meaning Wall Street is closed and President Barack Obama is inaugurated, it’s fitting that I confess — “I had a dream!”

The dream, which I had around mid-2012 was that we’d finish off the year with a credible market rally and that 2013 would be another positive year on the stock market.

It hinged on European politicians and the European Central Bank (ECB) getting real with their problems. They needed to downgrade their passion for austerity and allow the EU’s money supply to be loosened.

The dream then had China growing better than expected putting paid to those experts, I mean ‘experts’, who were always predicting China would have a hard landing.

At home the Reserve Bank (RBA) realised the errors of its ways and let interest rates slide, and the Federal Treasurer, Wayne Swan, woke up to the fact that a budget surplus was unlikely and unnecessary given the slowing economy.

The dream knew a fiscal cliff awaited it at the end of 2012, but it hoped that good sense would prevail and the rally would roll through into a Santa Claus rally, followed up by the usual January effect where stocks generally go higher.

Ducks lining up

The next big challenge for my dream was the US debt limit ceiling, which needed to be renegotiated in March. Over the weekend, Republican politicians agreed to extend the ceiling for another three months.

This even excited European stock markets overnight with the UK’s FTSE up 0.43 per cent, the German DAX rising 0.61 per cent and the French CAC 40 putting on 0.57 per cent.

The ducks in my dream are lining up in a nice row but it can’t last — it never can on financial markets and in dreams, but I have a good feeling that the good news is set to outnumber the bad news across 2013.

There’s a plethora of smart market forecasters tipping a 10 per cent plus rise in stocks, but some outliers think it could be a 20 per cent plus year for stocks.

For this to happen, US companies in particular would need to use their repaired balance sheets to start investing, which would help job creation, consumption and then stock prices.

Japan is set to extend its money supply to boost growth and that will help global economic growth. This kind of thing is good for a commodity-economy such as Australia.

I believe this dream won’t turn into a nightmare for a few years, but the usual worrisome market moments that are bound to happen will be buying opportunities.

One or two RBA cuts?

Tomorrow, locally, we get the latest inflation reading and I hope my dream of a benign result, which will make it possible for the RBA to cut rates say one or two more times, comes true.

If it doesn’t follow my script, it won’t matter as I think the economy has had enough cuts, but I’d like a couple more to ensure the dollar doesn’t go too much higher and to see consumers as well as businesses start spending more confidently. If this happens, stock prices here can easily play follow the leader with Wall Street.

And if my dream continues to come true, we will be “free at last” from the debt-preoccupied doomsday merchants whose excessive warnings condemned over-cautious investors to four years of low returns after suffering losses when the market crashed over 2007-2008.

Gee, I hope my dream comes true.

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, January 22, 2013

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