By Peter Switzer
I’m back! Yep and this might ‘surprise’ you but I’m expecting another positive year for the economy and stocks. Sure, there will be moments when we cop some dramatic daily doses of stock market volatility but it’s not hard to argue that we look poised for higher share prices over 2017.
One of the big challenges will be that we have copped a lot of my expected positivity for this year in the space of two months, since Donald Trump shocked the USA and the world with a surprise win in the 8 November election. And then his surprisingly “presidential” victory speech, which helped turn around market sentiment towards what a Trump era might mean, added to positivity for stock prices.
Let me list the reasons for being optimistic for the economy and stocks. Here goes:
- Our first trade surplus for three years augurs well for our economic growth outlook and this year we should break the world record for growth without a recession of 103 quarters held by The Netherlands.
- Good growth should spark the much needed business investment our economy has been holding out for and along with the better export income from the likes of coal and iron ore, we should see wage rates start to pick up.
- Energy and mining exports are expected to bring in $204 billion this year, which has surprised many experts who saw good reason for the BHP share price falling to $14 last year. Its rebound above $25 tells a story.
- The Australian newspaper led with this today: “Ray of light in economic tunnel”, which is the kind of headline we have missed for years!
- China is performing better than expected and this is what Deloitte Access Economics’ Chris Richardson had to say on the subject: “China’s strength at the moment is definitely wonderful news for Australia but I’m wary of phrasing that as a turning of the corner.”
- Overall, this great export story has experts now saying that our Triple-A rating for our debt is looking safer as a consequence, which is good for interest rates.
- The low Aussie dollar will help our economy too over the year.
- Since November 8, our stock market is up 9% and this is the market betting on stronger growth and profits for the local economy and its companies.
- This goes double for the USA with the Trump effect creating the Trump rally, which has bolstered confidence — market, consumer and business — virtually worldwide.
- US wages are now rising at the fastest pace since the end of the recession in 2009, which is another plus for the critically important number one economy in the world.
- The outlook for Europe is better than what we saw in 2016, which was low but positive growth. Focus Economics saw it this way: “The Eurozone’s growth story has remained consistent throughout the year, driven by a strengthening domestic economy while the external sector has been lacklustre.” But 2017 looks rosier. “Heading into 2017, economic prospects remain encouraging. The recent depreciation of the euro should bode well for the region’s exports,” the economics think tank concluded.
- Going to Japan, this is what Focus Economics had to say: “Economic activity has performed relatively well in Q4 as the weakening of the yen following Donald Trump’s victory in the November U.S. presidential election and a modest pick-up in global growth supported business confidence.” The economy still has its problems but the 2017 verdict was: “An accommodative monetary policy and a weaker yen are expected to boost growth next year.”
I rest my case on why I have a positive view on the economic and stocks’ stories but here’s what I’m worried about:
- Mr Trump has promised to double economic growth to over 4% and he has said he’d create some 25 million new jobs in 10 years but this can only come from deregulation and lower taxes, so Congress and time could be Donald’s and stock-players’ enemies.
- Even if Donald gets his way on taxes, the effects won’t happen until 2018 or 2019, though the stock market would react ahead of it.
- Congress roadblocks to Donald could breed negative market reactions, though I would use these volatile dips as buying opportunities, which I expect to see and call this year.
- The Fed could raise rates too quickly but I’m less afraid of this scenario than others.
- The Internet and digital disruption will hurt many businesses and sectors, with retail in the USA already struggling because of the rise and rise of the online shopper, as well as the consumer who wants experiences rather than promotions in big, old department stores.
- I also worry about Donald T and what he says and does to China over trade and business. This could easily spook stock markets.
- Elections in France, Germany and for the Dutch could all worry stock markets but after our Brexit and Trump experiences in 2016, these could also create buying opportunities.
So how am I investing?
Last year I liked the big miners when they were belted up and the banks along with other big cap company stocks. I also liked the overall index and I bet ETF players did too, if, say, they bought the ASX 200 index at 4,707 for a 22% gain!
This year I’m not dumping the big caps but the upside will probably be restrained, so I’m looking for smaller companies that have a good business model and especially if they also have a good history for paying dividends, which actually grow.
I think we’ll see 6,000 on the S&P/ASX 200 index and the next target is 6,300, which is only 9.4% away.
I don’t think the bull market is dead yet and history says we beat the old market index high before stocks head back into crash territory. Donald T could bring forward the timing of the next crash but I doubt whether he’ll manage it in one year. Hillary Clinton would not have excited markets and so the rise in stock prices would’ve been slower and therefore crash time might have been a lot further away than with Donald.
As many of you know I like the observations of Sir John Templeton who told us: “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.”
Even the USA is not in the euphoria phase yet and I suspect Congress and the realities of politics will slow up the arrival of this pumping up of market positivity, which means we have time to build a bit of wealth.
Happy New Year to all of you and my team and I will be working on making it a happy one for you for most of the months ahead. Of course, there will be some mad moments and my few critics who have gone silent recently, will re-emerge from their secluded negativity to give me another lesson. That’s what goes with the patch.
Like most years since March 2009, I suspect 2017 will bring more good news than bad and the doomsday merchants will again be silenced. One year they will be right but I doubt whether it will be this one.
By Peter Switzer