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Have faith

In case you missed it (and I don’t know how you could), lots of Aussie investors and super members are really cheesed off with the stock market. For our younger players, it has bred cynicism towards bankers, the big end of town and shares. To older wealth builders it has incensed them so much that many have run to cash so they can preserve what they have left and/or sleep at night.

For those who just can’t afford to gamble on the history of stock markets, I understand if you have turned tail and run away from stocks, but if you aren’t in this vulnerable or panicky class of wealth builder, then all I can say is, have faith!

I have to admit we have clients in our financial planning business who have just wanted to play it safe and we have helped them do that, but others have been diversified and can afford to lose some capital in the bad years on the basis that it will return big time in the good years.

For these types of investors, as long as the portfolio of assets they have under their belt can outperform term deposits, they’re happy, as their annual flow of income has at least beaten the ‘sleep at night’ option of fixed deposits, which are returning five per cent plus.

Cautiously positive

So, for all of those who have maintained the faith in stock markets or who are thinking about giving up their safe stance to re-dip their toes back into equity markets, here is what I’m seeing now which has me cautiously positive.

Since October, the S&P 500 index is up around 20 per cent and that’s a sign that all of the panic that came in August has worked itself out of the system, but the fear, loathing and anxiety is still there, albeit in reserve. That’s why we haven’t seen some massive days, which would scream out the headlines that “the bear market is dead — long live the bulls!”

Locally we’re up around 10 per cent and so we have a lot more potential upside but it could be a while before we see this materialise into really big gains for stocks.

US outlook

By the way, despite these nice rises, which only partially offset bigger slumps, especially here, a US expert insists stocks are cheap!

Recently CNBC pointed to the Bespoke Investment Group, which expects shares to rise 11 per cent this year with the S&P 500 tipped to hit 1400.

They argue that on a price-to-earnings, price-to-book and dividend yield ratio basis, stocks are at levels not seen since 1990!

Helping to create the rosy outlook is the better-than-expected performance of the US economy and the country’s top companies with their recent profit reporting.

Underlining the better times in the USA has been the fall in unemployment to 8.5 per cent and the US shopper is starting to head for the malls again with the Thomson Reuters/University of Michigan consumer sentiment index hitting 74 in January, which is the best reading since May last year! That was the month stocks gave in to gravity and kept doing so until October of 2011. 

The golden cross

On a technical analysis basis, the number watchers tell me a golden cross is happening and that’s great for stocks as well.

A golden cross formation happens when the 50-day moving average crosses and goes higher compared to the 200-day moving average.

It can also be a forerunner to the development of a bull market and so it has a tendency to get traders excited. By the way, the success rate of a golden cross leading to good news for shares is in the very high category. History points to a six per cent increase over the ensuing six months.

Developments in Europe

Meanwhile the news out of Europe continues to be better than it had been for most of 2011 and it’s a good sign that the European Central Bank’s (ECB) repo operations are helping bring down interest rates in Europe. Reuters says the “three-month dollar Libor, the cost at which European banks can borrow dollars, marked its ninth straight day of declines”. 

Fear subsiding

Personally I like the VIX or fear index for US stocks sitting around 18 and that’s a good reading meaning investors are heading back to stocks. Over the weekend, Reuters reported that Credit Suisse in the US was the first investment bank to upgrade its call on where stocks were going in 2012. 

2012 better that 2011

Seriously, there are more positives out there but there are negatives as well.

On the negative side we have a lot of European Union negotiations to come to get the eurozone fiscally responsible enough for the ECB to add more to the money supply. But at least it looks like progress is happening and when it becomes more convincing, some time this year, stocks will soar. I reckon 2012 will be miles better than 2011 — have faith!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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, January 30, 2012

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