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Peter Switzer's investment strategy for 2020

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Lately I’ve been getting into the tipster business suggesting the stocks I liked as we got closer to a trade deal. And I have to say I’ve liked my strike rate and I thank my experts on my TV show for helping me with my selections. (You could do worse than look at the last few shows to see what was selected as I suspect many of these will have legs rolling into 2020.)

The UK election was a bonus, which I expected, but as we all know being too confident about modern day polls can be a mega-mistake of Bill Shorten proportions!

Last week, I told my readers of 'Switzer Daily' that there were three big issues to watch for stock players. First was the trade deal and that was a big tick. Then there was the UK poll, another big tick. And then there was the run of economic data, which I was hoping would give us a clue that the 2020 Oz economy would pick up and help boost profits and then share prices.

Along with China, Donald and BoJo have helped the external economic picture and they should be a plus for stocks. The gains could be less than you think because a lot of this was baked in already by an optimistic Wall Street.

However, the local economy continues to labour.

The latest run of economic data hasn’t been great.

Consumer and business confidence are leaning towards pessimistic. Economic growth is 1.7% for the 12 months to September, while the December quarter has hardly been great. Unemployment rose from 5.2% to 5.3% in November and employment fell for the first time in 17 months. Retail was flat-lining and car sales had the biggest annual fall in a decade! And residential building fell by 3.1% in the September quarter – the fifth straight decline, while work done is down 10.6% over the year – the biggest annual fall in 18 years.

This isn’t great and we need to see a turnaround and fast.

The stock market would love to hear that the Treasurer is bringing forward tax cuts to help the economy and avoid another interest rate cut in February but this looks unlikely, unfortunately. We need a positive circuit-breaker and with today’s MYEFO (Mid Year Economic and Fiscal Outlook) forecasting surpluses for the next four years, fiscal stimulus is still possible.

ScoMo wants a $5 billion budget surplus, which would be a gold star for Treasury but if the economy doesn’t pick up, then that star will be tarnished by year’s end and stocks won’t look great.

I’m sure we’ll see a positive and stimulating budget in May but I hope it’s not too late. Treasurer Frydenberg is gambling and as I’ve said, Donald and Boris have helped him.

The US market view is that the first phase trade deal will boost business confidence, investment and company profits. Right now, the consensus view on the target for the S&P 500 for 2020 is 3318, which is 5% higher, but that could prove conservative if another trade deal happens, a US-UK trade deal happens and Donald Trump takes out the November election.

The fourth year of a US Presidency is the second best behind the third year, which has been a ripper in 2019, up about 26% year-to-date. And thank God for our follow-the-leader tendency with Wall Street, with our market up just over 21% and we can thank the Yanks, Donald and Jerome Powell for a lot of that!

I know I tested many of you and your faith in me when I suggested we could see 7000 on the S&P/ASX 200 Index earlier this year but we’ve come awfully close and the year isn’t over yet. I gambled that Donald Trump would eventually be rational and get a trade deal and that bet paid off. Jerome Powell’s three rate cuts also helped.

So how do I play 2020?

I’ve told my financial planning clients for months that we invest based on a trade deal before Christmas that would help power stocks into March or April. Then we should assess what lies ahead, remembering the old market cliché of “Sell in May and go away, come back on St. Leger’s Day.” This is around September but I prefer November for safety.

Here are some facts about the US stock market and what happens with a Presidential campaign:

  • If you examine the return of the S&P 500 Index for each of the 23 election years since 1928, you’ll see that it was negative in only four of them. (thebalance.com);
  • Pepperdine professor Marshall Nickles, in a 2010 paper called 'Presidential Elections and Stock Market Cycles', presented data showing that a profitable strategy would be to invest on October 1 of the second year of a presidential term and sell on December 31 of year four. (ie the third and fourth years are best).

These returns don’t always work out but there is an historical inclination towards them being pretty reliable.

Putting it altogether to make an assessment of what your investment strategy should be for 2020, you’d have to think the politics will be pro-stocks, though Trump threats on the EU’s luxury imports is a small concern. The UK and EU should benefit from a Brexit solution and China’s growth should pick up with a trade deal, which will be good for global growth and business confidence.

“The key is you are telling businesses not only tariffs are not going up, but they are going down. The biggest consequences of that is you could start to see business spending going up as confidence is coming back,” said Daniel Clifton, head of policy research at Strategas. (CNBC)

This has to be a plus for stocks so the only challenge now is to work out what stocks you should buy and that’s where we come in.

So my best tip today about 2020 is a self-serving one but it has been one that has worked well since March 2009, when this bull market started — watch this space! And maybe the Switzer Report could be the gift to friends and family that keeps on giving!

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 16 December 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.