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Start of the pullback?

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by Peter Switzer

We have turned a little bit chicken in Australia, losing 3.82 per cent over the week on the S&P/ASX 200, while the Yanks's S&P 500 index actually went up 2.2 per cent in the same time.

So, as September looms, is this the start of the often talked about pullback?

Our market was not helped last week by Westpac’s gloomy outlook on debt with impairment charges rising to $865 million in the June quarter compared to $811 million in the March quarter.

And its trading update for the current quarter was not flash being more flat and this was an indicator that hit all banks’s share prices.

World markets

Meanwhile the Americans refused to play ball, with its market closing higher on Friday. The Dow Jones put on 1.67 per cent, the Nasdaq 1.59 per cent and the S&P 500 rose 1.86 per cent. That was four days in a row of rises in New York.

Good US economic news

Good economic news helped with existing-home sales up a big 7.2 per cent, which was the biggest rise in two years and there has now been four months of rises for this measure.

Comments from Federal Reserve Chairman Ben Bernanke to bankers at Jackson Hole Wyoming that the economy was recovering, albeit slowly, helped investors stay positive. The Dow is now at levels not seen since November last year, while the Nasdaq and S&P 500 are at levels on par with those seen last October.

In fact, this shows that US markets have only worked their way back to where we were when the global economy stared over the financial precipice into the abyss. This was averted when governments around the world rallied to protect their banks and their economies stepping up to the plate before it was too late.

September pullback

The S&P 500 is up about 50 per cent since the March lows and that’s why some experts say a 10 per cent pullback is overdue. And September is a bad month for the US stock market. Lehman Brothers was allowed to fail in September last year and the market dived. Then there was 11 September, when the market went south big time too.

The AFR says ANZ research shows the Dow loses 1.3 per cent on average in September while we only average a 0.3 per cent drop. October is our shocker month with losses averaging around 1.2 per cent.

A theory

There are lots of theories why this happens and Shane Oliver from AMP thinks it could be partly related to tax-loss selling by mutual funds whose end of financial year comes in October.

Oliver was on my program on Sky News Business Channel — SWITZER — recently and he said on his calculations of equity risk premiums (ERP) the stock market has plenty of upside.

Some think you need to get an extra six per cent return on shares over bonds to buy shares. So when interest rates or yields on bonds fall and share prices and dividends are relatively healthier, then stocks are bought in preference to bonds.

Oliver thinks six per cent is too high and that three to four per cent is sufficient to get share buyers running for shares and that’s why shares have been and will continue to do well.

Already in the bull market

He does not rule out a pullback, and September and October are sufficiently spooky for investors on a historical basis. His market crystal ball is telling him that the bull market started in March and by Christmas it will be higher than where it is today — even with a pullback!

If you believe Oliver, a buying opportunity could lie ahead over the next two months.

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: Monday, August 24, 2009