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Oz economy down, Wall Street tumbles

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by Peter Switzer

The economists of the world should be doing a Homer Simpson ‘Doh!’ as their economic prognostications come up plain wrong.

Locally, the Aussie economy has contracted to a magnitude not seen since Paul Keating’s ‘recession we had to have’ and over in America the continued run of soft data has sent Wall Street tumbling down over a big two percentage points!

But don’t worry, the experts, who now nearly always get it wrong, say the hiccups are temporary.

Data watch

In the US, a poor private job creation report for May spooked investors with only 38,000 new jobs found over the month. Meanwhile the Institute of Supply Management’s manufacturing index fell from 60.4 in April to 53.5 in May.

In the US, there have been two months of softer economic data and it’s said to be linked to the Japanese disaster and a terrible spell of bad weather. I must admit I can see some truth in this argument but I think stocks will still have a few challenges for a few months.

Market gains

By the way, Ron Bewley, from Woodhall Investment Research, says his most recent research on the US market says the recent sell-offs are not likely to be too dramatic. He says the US market will rise around 15 per cent from here and the local S&P/ASX 200 is set to rise 20 per cent over the next 12 months.

Ron’s research is more long-term focused but he has had a good track record. And by the way, the market P/E is 11.5 but the long-term average is 14.5, which should be a buy signal under normal circumstances.

Soft economy

Locally, our economy contracted 1.2 per cent in the March quarter and the Queensland floods and cyclones are being blamed. I think a large chunk of this negative number is down to disasters hurting mine and farm production but the economy is soft.

Some economists now ‘bravely’ say no interest rate rise in June but watch out for July!

They are mad or on medication or need to be!

The RBA has to wait until July’s inflation number before it even thinks about raising rates. Of course, I think they should be on hold for the rest of the year to help consumers and small business gain confidence. This might also weaken the dollar, which would help the economy and boost share prices.

Let’s hope good sense prevails.

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: Thursday, June 02, 2011

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