What now for markets?
by Peter Switzer
By mistake I read a download from a US website from 4 March, where an esteemed commentator claimed oil prices over US$100 a barrel would have to hit stocks. Well it has been there for over a month and stocks have still headed up.
So, what could derail the market optimism? Three immediate things would KO confidence in shares. The first would be a significant U-turn for the US economic recovery. Second, a disappointing US earnings season, which starts with Alcoa reporting on Monday and third, hostilities hotting up in Libya and the Middle East that drove the price of London Brent crude over US$120 a barrel.
Right now the market is a bit twitchy but still positive. The Dow Jones lost nearly 30 points on Friday to end the week at 12,380.05 but it was up 0.03 per cent for the week.
The S&P 500, now at 1328.17 dropped a measly 0.32 per cent for the week and that hardly says there is panic out there. And with all those scary threats to investor confidence out there the S&P 500 is up 5.61 per cent for the year and the VIX or fear index is at a low 17.87. (Any number under 20 is a low fear result.)
Against this, gold hit another record high, closing above US$1473 an ounce. Now we know gold is the place to go when you are nervous about excessive inflation or a recession but there’s also a lot more interest in gold because the Indians and Chinese love the stuff. As they get richer, the market demand for gold rises but I do believe there’s a fair bit of hedging going on by those who fear inflation from excessive money supply worldwide and the prospect of higher oil prices pushing up inflation as well.
Rate rise in Europe
Over in Europe, the concern about recession has passed with the European Central Bank lifting its equivalent cash rate by 0.25 percent last week.
This helped the euro and weakened the greenback but this is good for the US economy, which has been helped by a low dollar. It’s Paul Keating’s J-curve effect, where a diving dollar initially hurts your trade accounts but eventually you sell more exports and buy less imports and your trade accounts as well as your economy benefits.
Buy in May and stay?
Looking at the US recovery we are now seeing jobs and even retail surprise on the high side last week and retail stocks have been upgraded. Even wholesale inventories rose one per cent in December, which was the best level for 10 years.
To the upcoming earnings season and if this turns out worse than expected then we could see share players succumb to “sell in May and go away”, as the old market rhyme goes. However, if they beat expectations, which is possible given the improving economy, then Southern Cross Equities’ Charlie Aitken could be right — it might be a case of “buy in May and stay!”
Finally, oil is the big bogey factor. If it goes over US$120 and stays there it will hurt demand and inflation and could weaken all economic recoveries, in turn hitting stocks.
I’m expecting the US recovery to continue and I suspect earnings will please the market but oil is a curve ball I’m not sure I can hit out of the park to allay your fears. However, stock market trading is often like this until the boom takes hold and everyone is a confident buyer.
This usually runs ahead of a crash! And that’s why I remain a stayer when it comes to shares.
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: Monday, April 11, 2011
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