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What will the market do this year?

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by Peter Switzer

A very well-known fund manager recently said “I don’t know,” when I asked if he thought the market would be up this year. It is a ‘cute’ answer but it has become a badge of honour for stock pickers to say they can’t effectively guess what will happen to a market but they can pretty well predict what an individual company will do.

By the way, a lot of fund managers and stock brokers live in fear of ETFs as it gives stock players a chance to play shares automatically without ‘expert’ help.

So if this guy said he thought the market would be 15 per cent higher and he’s right and someone bought a S&P/ASX 200 index ETF, then it would be a 15 per cent return the easy way!

Aussie market cheap

Of course, it isn’t easy to guess the market’s direction, let alone how far it will go in either direction but there are equations that help market experts set some targets for indexes. Projected earnings per share and price/earnings ratios can lead those trained in this stuff to make the call whether a stock market looks cheap or dear.

Those numbers say the Australian market is cheap right now while the US market, which has increased around 25 per cent since September, is looking a little dear on a comparison basis.

High interest rates and the steroid-pumped Aussie dollar haven’t helped a lot of local companies so share prices have actually lagged behind profits. I expect a catch up this year, especially if the dollar eases later in the year and the Reserve Bank remains on the interest rate sideline.

The headwinds

All of this is well and good but stock markets are not just determined by profits — they can be sideswiped by unexpected events such as earthquakes, tsunamis, nuclear meltdowns and when idiot tin-pot dictators rich in oil meet their ‘pissed off’ people. (Excuse the French.)

And then there’s the debt black cloud, especially in the US, which the IMF says it’s worried about.

The Financial Times reports that the IMF says the Yanks don’t have a “credible strategy” to stabilise its public debt and it could cause another GFC!

For America to meet a pledge made by the G20, it has to cut its deficits in half by 2013, which would mean a massive austerity program.

“It is a risk that if it materialises would have very important consequences ... for the rest of the world,” says Carlo Cottarelli, head of fiscal affairs at the IMF. “So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”

But this seems hard to imagine happening with President Obama on the nose and an election coming up in 2012.

The JPMorgan Chase result

Meanwhile, JPMorgan Chase came in with a 67 per cent jump in first-quarter earnings beating expectations.

Two worrying signs were the fact that consumer loans fell by 10 per cent and corporate loans did not go up to offset this mediocre result.

A persistent problem for the bank is its residential home loans, which has a foreclosure issue to deal with. They copped a $650 million charge against earnings because of the troubles in the mortgage belt.

The bank’s boss Jamie Dimon was frank about these mortgage hits: "Unfortunately, these losses will continue for a while."

Buy the dips

Meanwhile, the Yanks will have to deal with the end of QE2 in June and this will hurt market confidence.

Despite these headwinds, I believe the US economy continues to improve and that low greenback is a powerful help to US production.

We are bound to see some anxious moments this year but I think broad index ETF players could do well if they buy the dips.

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: Thursday, April 14, 2011

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