Time to buy stocks?
by Peter Switzer
What I’m about to attempt should not be tried at home without proper supervision and experience. It, in a nutshell, is ‘advice’ on whether you should go into the stock market this year!
This is a challenging issue to deal with because if someone takes my ‘advice’ and stocks turn down I could be accused of leading my readers astray but more importantly I could cost them money – in the short-term.
Before going any further, note that I put the word ‘advice’ in inverted commas and that’s because it’s not really advice. In all modesty, what you’re about to read is nothing more than ‘brilliant’ investment education and so I’m not legally liable if you lose some money this year following my words of ‘wisdom’.
In summary, I think the US stock market will end up for the year and that’s an easy call because it’s already up solidly this calendar year. The Nasdaq is up close to 20 per cent while the S&P 500 index has wacked on around 12 per cent.
However, our market is only around six per cent higher and that means we could face some headwinds in taking our index to better levels. That said, share experts I know are often dodging the thorny question of where the S&P/ASX 200 index will end up this year, and some are even negative on what the index could do but they’re still positive towards stocks.
What? The stock gurus like stocks but aren’t sure about the index – what’s that all about?
Well, many stock experts – fund managers in particular – are feeling the pressure from ETFs and index funds, which take the picking out of portfolio construction. Fund managers are active managers while those creating index funds or ETFs based on the index are passive managers.
Now history says the majority of fund managers don’t beat the index – they make bad decisions and so the argument goes that fund managers are overpaid and you’re better off simply punting on the index.
Now that analysis is OK if you don’t know how to pick the good fund managers and so rather than gambling on an individual and his or her team of analysts, you can simply say you’re happy playing the index. You don’t want to shoot the lights out, no, you’re happy if the index goes up by five per cent and you pocket about five per cent in the dividends and by throwing in franking credits you are playing for a return around 10-12 per cent.
Some experts say this can happen seven out of 10 years. That’s based on a bit of loose analysis but it’s not too far out.
Some of the fund managers I know think there’s terrific value in many companies in the S&P/ASX 200 index and even outside it but collectively they won’t necessarily push our index up to levels similar to Wall Street and the Nasdaq. By the way, European markets have also seen big rises as well compared to us and the common links have been a rapidly expanding money supply, a depreciated currency and largely battered economies emanating from the GFC-created recession they all went through.
Meanwhile here, we have a constrained money supply thanks to an over-zealous Reserve Bank (RBA), a strong currency, also related to the policies of the RBA, and we avoided a recession. I have actually seen our S&P/ASX 200 index expressed in US dollars and we have actually gained a lot more like those rises we have seen on the New York Stock Exchange.
Over the rest of this year I expect to see the RBA cut rates not one but hopefully two times. That will help the economy grow faster and take some heat out of the currency. Many of the industrial companies restrained because of the dollar and interest rates, which have turned business as well as consumer sentiment down, could start actually showing some decent share price growth.
Sure I think we will have to negotiate issues such as Iran and its nuclear ambitions, Spain as well as Italian debt challenges and the general problems that the European Union will face, including a recession. But I think the momentum coming from the expanded global money supply with company balance sheets in good shape keeps me in the positive camp for stocks.
I like it that bond experts are telling us that we should have more bonds and less stocks just when bond yields around the world are unbelievably low. That’s a good omen for stocks especially when stock dividend yields are better than term deposits and bond yields.
I also like it when there are still doomsday merchants scaring people about stocks because I take a tip from Warren Buffett. He once admitted that he was fearful when others are confident but when other are spooked that’s when he’s buying good companies he wants to hold for at least 10 years.
It’s good to be able to pick market booms and crashes but it’s too hard and so I buy companies I like and I hold them until I don’t like them, which means 2012 is just another good year to buy stocks.
Ironically the best years to buy stocks were the crash years of 2008 and early 2009 but that’s when the majority of investors weren’t buying and many ran to cash.
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, April 04, 2012blog comments powered by Disqus