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Is it time to buy or fly?

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The big question for all of us is: are we looking at another buying opportunity with our stock market down 11.3% from its August 12 high of 6339.2?

Source: nabtrade

Before Christmas (16 December to be precise), we were off 13.2%, so we might already have some proof that the downtrend has bottomed and a new uptrend is in train. To be frank, I’m not entirely convinced because Donald Trump is the most difficult US President to make predictions upon, but I do believe he knows his re-election chances will be zip if the stock market crashes and a recession shows up this year or next.

Now remember, many economists have named 2020 as the time most likely for a US recession. The Economist Intelligence Unit tipped this 12 months ago so it has to be a high priority for President Trump to prove them wrong.

The recession fear would’ve been behind his criticising of the Fed boss, Jerome Powell, about the central banker’s plan to keep raising US interest rates this year. I’m sure the Trump trashing of the Fed and some slower global and Chinese economic growth signs, on top of some softer US manufacturing readings, explain why Powell gave Wall Street the message on Friday that he might not raise rates this year, if the economy doesn’t need it.

That clear indication from the Fed chairman and the 315,000 jobs that showed up in December, which screamed that talk of a recession in the US any time soon is way off the mark, explained the big jump in the Dow.

Getting back to my observation about the downtrend for stocks, here and in the US, giving way to a small uptrend, two of the four threats to US stocks going higher have become less worrying. Those four threats for stocks were:

  1. The Trump trade war
  2. The Fed raising rates too fast and too high
  3. The threat of a US recession in 2019
  4. Much worse-than-expected US company profits showing up this year

Clearly, the threats numbered 2 and 3 have been downgraded. Now we wait for the Trump-Xi Jinping trade negotiations in coming weeks (ending in February) and the company earnings show-and-tell that hots up in early February, to either make or break the stock market.

If a trade deal is nutted out to Wall Street’s satisfaction and US company profits come in around 8-9% (instead of the zero growth for profits that the recent sell off of stocks implied), then this current uptrend will get bigger and better.

That pretty well sums up what we have to hope for if we’re going to have the guts to go long stocks now punting on a better year for stocks in 2019 than we suffered in 2018.

Historical rules of thumb say buying looks like the play.

These include:

  • Months November through to April are the best for stocks.
  • The third year of a Presidency is the best for stocks.
  • The Bank of America Bull & Bear Indicator is in “extreme bear” territory but historically that actually has been a great “buy” signal!

That said, there are still a lot of curve balls out there for stocks coming from China, the UK, the EU and Russia, as well as from stretched banking and monetary systems that all say “be careful!”

Making it harder for Aussie investors are the recommendations from the Hayne Royal Commission, which could KO the bottom lines of banks and other financial companies that make up 33% of our stock market. Right now, the consensus seems to be saying that the banks, in particular, have been over-punished by the market but that’s only a best guess view. What the RC will say and how that will hurt bank profits remains uncertain.

And then we have the house price drama, which I argue is being over-hyped by the media but nonetheless affects consumer confidence and even retail numbers. Sydney prices have dropped 8.9% over the year while Melbourne is off 7%, but nationally the fall is only 4.8%. Core Logic’s Tim Lawless is seeing more falls this year but he’s not in the 20% plus to 40% price drop club.

On top of the RC and the house price problem, we have a federal election, which Labor looks set to win and these ‘guys’ have changes planned for negative gearing and the capital gains tax discount that will do little to bolster share-buying enthusiasm.

However, I think the local factors are manageable and provided nothing silly happens with the Trump trade negotiations, then I think 2019 will prove to a better year than 2018 for stock players.

Over the past decade 2009-2018, we had three down years for stocks — 2011, 2015 and 2018 — and this is a high number of negative years, which makes me think a positive one is more on the cards.

Before I sign off, look at this analysis written by Sam Stovall, who is the chief investment strategist at CFRA Research and who I interviewed when I took my TV show to Wall Street a few years ago: “The 56 pullbacks since December 31, 1945, dragged down the market by an average of 7%, taking about one month to go from peak to trough. However, the S&P 500 then took an average of only two months to recover all that was lost during these declines. What’s more, the market took only about four months to recover fully from declines of 10% to 19.9%.

So in greater than 85% of all declines of 5% or more since World War II, the market got back to breakeven in an average of only four months or fewer! Finally, the S&P 500 took an average of only 14 months to recover from the more typical “garden-variety” bear market (declines of 20% to 39.9%), causing one to conclude that if an investor can’t wait a year, then they probably have no business investing in equities!

Peter Switzer is one of Australia’s leading business and financial commentators, launching his own business 20 years ago. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531). All prices and analysis at 7 January 2019. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.