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Market higher in March quarter

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by Peter Switzer

If you’re scratching your head asking how long can the market keep going up and why is it going up, well let me ‘manufacture’ you an answer. Despite expectations to the contrary from the economists, who have proved themselves pretty ordinary, as a group, in predicting the course of important economies in recent times, manufacturing data in the UK, China and the USA have all shown positive signs.

These not only bode well for the economies in question, they pump up the global economic story and reduce the fears of a deep and prolonged recession in Europe. And while this may only be a temporary development that could unwind with new, bad news in some weeks or months time, the current economic story is positive and so stocks are up.

Benefits of a rate cut

My only hope today is that the Reserve Bank (RBA) gives up its stubborn ways and cuts interest rates to help the currency trend lower.

With an improving world economic outlook, the currency usually heads up and so anything that can be done to put a lid on the dollar would help exporters and import-competing industries. Also I would argue that both business and consumer confidence would improve if rates fell. The potentially better news is that Matt Sherwood, head of research at Perpetual, thinks banks would follow suit if rates were cut but better still if they didn’t he insists the RBA would keep cutting until the banks were forced to play ball to ensure monetary policy objectives were achieved.

On Wall Street overnight

Back to Wall Street and the Dow ended the session 52.45 points or 0.4 per cent higher to 13,264.49. Meanwhile the S&P 500 put on 10.57 points or 0.75 per cent to 1419.04.
So what drove markets up again following the S&P 500 zooming up 12 per cent in the March quarter, making it the best three-month growth for 14 years?

By the way, even though April started the sell-off last year, history says over the past five years it has been a positive month for stocks.

Helping stocks was a better manufacturing read with the Institute for Supply Management's manufacturing index spiking to a better than expected 53.4 in March. Against this, construction numbers were worse than expected and a result like this reminds us that the Yanks still have a long way to go before housing kicks into this recovery. That’s when the Fed will butt out and interest rates would rise.

Adding to the positive picture, the China manufacturing data has been well received and the Poms also came out with a better result for its factory production, though the eurozone’s figures were more consistent with the recession fears for the region. The latest data shows an eight-month decline and the most recent was worse than expected and this is the kind of black cloud that could eventually rain on Wall Street’s seemingly, never-ending parade.

RBA surprise?

On the subject of cloud-bearing rain, I’m hoping that the RBA will surprise economists who all think there will be no change today for interest rates. By the way, many well-known economists I talk to remind me that while they might predict the Bank won’t move on rates, that’s not the same thing as saying they believe rates should not be cut.

Many know our non-mining economy needs a shot of confidence and they would not be critical if the RBA relented. There’s a prediction the Bank wants to see April’s inflation figure but the TD Securities inflation gauge shows that we don’t have an inflation problem but we do have an economic growth problem. The usual prescription for this sickness is lower interest rates.

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, April 03, 2012

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