Business News

In the “I Dunno” Zone

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by Peter Switzer

The stock market has slipped into the “I dunno” zone, where I expect a pullback after a great run up and that’s actually happening in Europe right now where stocks are at a two-month low. However, I’m comfortable on my long run view that stocks head up and the fact that the euro is getting stronger confirms my optimism.

The euro is going up on better economic forecasts for the EU with recent German manufacturing orders in December up 0.8 per cent. Not helping European stocks is the spectre of the ex-Prime Minister, Silvio Berlusconi, who could be re-elected by the wild and wacky voters of Italy. Then there’s a corruption scandal for the Spanish leader. Both stories haven’t helped bond yields, but I’m not stressed about yields going back to where they were last year.

More rate cuts?

The big issue for me today is the unemployment report in Australia. After the weak retail figures for December out yesterday, economists who were saying the Reserve Bank is done with rate cuts, have now said if the job figures aren’t flash, it will be game on again.

You guys know my view — a couple more cuts won’t hurt — given how nervous business and consumers are, and given how diligently Aussies have become with saving. The latest ING Direct Financial Wellbeing Index confirmed this with savings and debt reduction now key goals for many of us, and “paying down or avoiding debt…the primary financial goal for 37 per cent of Australians”.

If interest rates fall, the dollar will weaken and help some local businesses, which in turn will mean some company profits improve and this helps their share price.

We have new people coming to the stock market who are running away from low deposit interest rates, and against this we have a market that rocketed along up over 22 per cent since mid-2012, some US Congress challenges in March that could hurt stocks, silliness in Europe generally, and the old “sell in May and go away” threat that can sometimes happen in April.

Short-term confusion

Traders will take profit soon and long-term investors will cop paper losses and could buy more good stocks on the dips.

This is why we’re in the “I dunno” zone. How you respond is up to you but I’m comfortable for stocks for the year overall. It’s just in the short term that I’m scratching my head.

Overnight, the Dow gained 7.22 points or 0.05 per cent to 13,986.52 and the S&P 500 put on 0.83 of a point or 0.05 per cent to 1512.12.

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Published on: Thursday, February 07, 2013