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Sit tight

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by Peter Switzer

No conviction on Wall Street with mixed data not giving any solid reason to buy or sell en masse. And so it poses the question — what's my next move? The answer is — sit tight as this market malaise will turn.

That’s not to say that some time soon the stock market will go back to boom times. Dr John Hewson, who before he was a Federal Opposition leader was one of the country’s best academic economists as well as consultants to prominent investment banks, believes the US will limp along with slow growth for a number of years.

Ultimately, this will affect the power of the stock market to rack up big returns year in and year out but in the case of the US it won’t be hard to beat interest-bearing securities, with the 30-year government bond rate under four per cent.

Home loans in the US are closer to 4.5 per cent and the Fed’s commitment to quantitative easing — which is akin to printing money — will keep interest rates down for some time.

This will force American investors to eventually look to Wall Street for better value and by that I mean good dividend paying stocks with exposure to Asia in particular, because that’s where economic growth will be solid for some time.

Double dip?

So, what about the double dip fear that’s spooking many US investors, and I’m sure is worrying Aussie investors too? Let’s face it, if Wall Street heads south, big time, because of a re-emergence of recession in the US, it will affect our share prices and wealth.

One guy who I think has a balanced view on the US is Larry Kantor, who is the head of economics research and market strategy at Barclays Capital.

He told CNBC if you look at the GDP numbers, the slowing “has been dramatic” with growth going from five per cent to 3.7 per cent. He thinks GDP is exaggerated compared with other economic indicators, which he thinks are more reliable for the health of the US economy.

He agrees the economy has weakened but by not as much as the growth numbers say. Remember, the Yanks take a quarterly result and multiply them by four to annualise them and that’s why their figures can jump significantly.

We add four quarters together so a big quarter fuses into a small growth quarter to average the number up. Both approaches have negatives and pluses but they can be misleading.

Kantor argues that the stock market, especially compared to bonds is “decent value”. When he looks at dividend yield plus the likelihood of some capital gain he goes for shares going forward.

He insists “the chances of a double-dip are remote” and cannot see a collapse of the cyclical stocks on the horizon.

He also pointed out that very few CEOs after the second quarter reporting season did not have an optimistic outlook for their companies and that’s important.

The good and the bad news on Wall Street

Overnight, Wall Street was basically flat reflecting that investors are not sure how to play the market given the economic question marks.

On the good news front, bank lending standards at big US financial institutions have started to ease, which should help small business. And manufacturing activity in the state of New York had a small rise after a bad previous month, though it was worse than economists’ expectations.

On the bad side, homebuilder confidence dropped to 13 in August and this is the lowest level since March last year.

What’s ahead?

Tomorrow morning, the market will be keen to see the latest industrial production numbers and Wal-Mart’s results could be an important gauge for how the US economy is faring. And the outlook statement will be crucial.

Locally, we see the RBA minutes and these should suggest that there is good reason to believe that interest rates are on hold for the most of this year and beyond.

For advice you can trust, contact Switzer Financial Services.

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, August 17, 2010