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My 2012 expectations

Now that most of us are close to being back to work for 2012, I thought I would lay down my expectations — not my predictions — for the year.

I thought it was the least I could do when I saw the Sydney Morning Herald’s headline: “Financial crisis: get ready for next wave!”

This came out of a World Bank warning about a downturn so severe it would be worse than what followed the collapse of Lehman Brothers. This, in a nutshell, would be GFC MkII.

Warning!

After teaching economics at such august places as the University of New South Wales and writing, as well as analysing, finance and economic matters for major newspapers and other media outlets for over 27 years, I have learned a thing or two about what the media can do with the warnings of impressive sounding bodies such as the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).

Let me say, no, warn straight up, this mob have the tipping credentials of trainers and jockeys who are about as reliable as a taxi turning up on time on a wet day.

When it comes to tipping a GFC MkII, I go back to an old Billy Joel line with a twist: “They may be right. They may be crazy”. In fact, I think they have gone over the top and Wall Street, at least for most days this year, has agreed with my more cautious view on what lies ahead for the world economy and stock markets. 

Look at the numbers

I reckon Westpac’s chief economist, Bill Evans, put this World Bank warning story into a sensible context when he pointed to the World Bank’s actual forecast for the global economy over 2012. The Bank has peeled back its old forecast from 3.6 per cent to 2.5 per cent and while some alarmists call anything under three per cent growth for the world economy a recession, the fact is that when the GFC happened, the world economy actually went into a real recession and contracted!

Economics and economic forecasting are complex games and that’s why Treasury, the Reserve Bank and most banking economists have been way off the mark with forecasts for inflation, economic growth, the stock market, unemployment and interest rates. 

Bad news vs. good news

Then throw in that the media has been trained to jump on bad news with glee and treat good news with suspicion, and you have the reason why newspapers run with scary headlines that will spook investors.

I blame the media and a few well-known people, one of which I tag as the Freddy Krueger of finance commentary, for scaring people into cash and out of sensible investments in the stock market. I hope this guy can warn people when the next big bounce on the market happens ahead of the start of the inevitable bull market.

If he can do that, he’s not Freddy Krueger, he’s God!

Over the long-term

I reckon it’s worthwhile to review what has happened with stocks since the GFC and even since the market crash before it – the dotcom bust in 2002.

Let’s just look at the recent GFC. Using S&P/ASX 200 closes, we can see what happened to many investors’ and super trustees’ nest eggs.

Their share wealth peaked on 1 November 2007 with the index at 6828.7 and by 6 March 2009 it had more than halved to 3145.5.

In the same month, the first big bounce happened and by 11 April 2011, the index had climbed to 4971.2. On 18 January 2012, we were at 4217.9 and so with this info we can have a look at how risky shares are and whether the media is too misleading for investors to rely upon.

On 13 March 2003, the index closed at a low of 2700.4 and by 1 November 2007 it had grown to 6828.7, a 153 per cent gain in just four-and-a-half years!

Even if we look at where we are now at 4217.9, the jump from 2003 when the index was 2700.4, is still pretty good. It’s about 56 per cent.

That means if you had $100,000 in stocks over that time, you would now have $156,000 but if you had it in a five per cent term deposit it would only be $140,000.

And being in term deposits gives you peace of mind but you won’t get the highs of seeing the stock market zoom ahead when the worst is behind us.

2012 outlook

So is the worst behind us? I suspect there could be some dramatic moments linked to Europe but I think they will manage it. I expect the EU to sign up to more fiscal discipline and the European Central Bank will help the banks, the governments and the economy of Europe.

I expect the Yanks to keep growing better than the doomsday merchants have been predicting and they have been wrong about a double dip recession in the USA.

I expect the stock market to end up this year in Australia and that we’ll see a big bounce.

Of course, I could be right, I could be crazy but I know I’m not a lunatic and history shows me that stocks eventually come through and if you can endure losses, they will reward you for the faith you show them.

But make sure they’re good stocks worth holding over the course of a stock market cycle.

Final comment

One final comment for those who hate the memory of the market falling by more than half – the 6828.7-level was outrageously high, built on too-easy money. Possibly it should have been more like 4000 or so and then the fall to 3145.5 would not have been so great. And by the way if we had never gone so high, we would never have fallen so far.

When you live in cloud cuckoo land, the fall to earth can be with a really big thud.

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.

Published on: Wednesday, January 25, 2012

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