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The RBA and the cliff

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by Peter Switzer

The fiscal cliff and some weaker than expected manufacturing numbers brought Wall Street down, but once again there was no overreaction from investors to the potential perils that lie ahead if the US Congress can’t cut a deal. And so the main market story today focuses in on the Reserve Bank (RBA) and whether its board is smart enough to cut interest rates today.

I’m not trained to guess what the board will decide today but I am trained to tell you what they should do and that’s cut by 25 basis points ahead of Christmas. I’d like another in February or March and that should be enough to help the dollar slide a little and build up business as well as consumer confidence.

Other expectations

At the same time, I’m expecting that the Yanks save themselves from falling over the fiscal cliff and are on course for two per cent plus growth with the stock market heading up in the first few months of the year.

This should coincide with better news out of China and other parts of Asia. By the way, even Japanese factory output came in better than expected overnight.

I hope for some improving headlines out of Europe and given the great rebound of the European Union’s stock markets recently, you might expect the economies of the eurozone could easily show some better signs next year. But this is more hope than certainty.

The picture I’m drawing is one where the run of news adds to optimism and by definition reduces negativity. It will coincide with low interest rates and bonds offering terrible returns, which makes shares look more attractive.

Negativity is the problem

Last night on my Switzer program on the Sky News Business Channel, Michael Knox of RBS Morgans insisted, based on earnings, shares are still cheap, but it’s negativity that is holding back nervous investors and until recently here, pretty good interest rates on term deposits.

Today the RBA has the chance to put another nail into the GFC-created anxiety which has restrained the stock market, but also prevented scared investors and super members from benefiting from the 44 per cent gain in the S&P/ASX 200 index since 6 March 2009. If you add in, say, four years of six per cent dividends, the loss could have been close to 70 per cent by running from the stock market.

Of course you could have made four years of six per cent being in term deposits but you have still missed out on 44 per cent! If your super fund was $500,000, then you have missed out on $220,000 by being too scared, by listening to doomsday merchants and by trying to pick or time markets rather than having a consistent plan to have some exposure to stocks, property, fixed interest and cash.

Of course, I think the external changes I have talked about in the USA, China, etc. are a good chance to happen, but we need the RBA to help us become more confident and that’s when we will leverage off the better investment environment abroad.

Let’s hope the board of the RBA doesn’t screw up today!

The latest data

For the record, the Dow lost 59.98 points or 0.46 per cent to end at 12,965.6 while the S&P 500 gave up 6.72 points or 0.47 per cent to finish at 1409.46.

In a surprise result, the Institute for Supply Management’s manufacturing measure contracted coming in at 49.5 but economists only expected a 51.3 result, though it was still the worst reading for around three years.

Against that, construction spending was up nearly three times more than was expected, which is a good omen for the improving US housing sector.

Also, Chinese manufacturing data was better than expected, which reinforces my view that China will be better than the Doomsday merchants have been predicting for most of this year.

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, December 04, 2012

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