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Are stocks overvalued? Joe and the RBA might answer that question

Peter Switzer
15 April 2015

By Peter Switzer

The next month will bring a truckload of data and events that will seal the fate of anyone trying to make money out of stocks between now and September.
Why that timeframe?
Well, I’m betting we head up this year, over the year, but with the run of ordinary news around now and expected average to disappointing news, it’s quite possible that this could be a “sell in May and go away year”.
Go away until when?
It’s often September but it can be later, once again based on news events.
There’s a long history of this stock market tendency going back to UK stockbrokers. It’s often said after months of cold weather and over the school holidays, investors can cash in their stocks and then come back when autumn starts.
It didn’t happen last year and that could increase the likelihood that it could happen this year but there are better reasons why it might this year. Here’s a list:

  • It’s been a big start to the year for stocks, with our market up over 10%, making a sell off highly likely.
  • The Yanks haven’t had a correction — a 10% plus sell-off — for a long time, based on history.
  • Goldman Sachs has just come out and argued that the US market is overvalued.
  • Michael Knox of Morgans, here in Australia, says our market is now overvalued and it’s because the RBA didn’t cut interest rates last week. His calculations say fair value is around 5800 rather than a tad over 6000, which he was arguing a few weeks ago.
  • The US market is up miles more than our market and is in record high territory. A sell off there makes sense but that won’t be ignored by other markets, such as our stock market.
  • US company earnings, now starting to hot up for the first quarter, are expected to come in at -3%. That won’t help. Overnight financial powerhouse, JPMorgan, reported better than expected but as I say, disappointment is expected when companies finally do the show-and-tells of their bottom lines.
  • Economic data has been disappointing. Like last year, a lot of economists say it’s weather-related. I think they’re right, but there’s also a bit of rising US dollar effect in there as well, which is going to hurt a lot of exporting American companies.
  • Iron ore and oil prices aren’t helping stocks at the moment and this is putting our market under pressure. However, I did like a point that Bell Potter’s Charlie Aitken made yesterday that as BHP’s share prices falls in relation to others rising, such as CBA, Macquarie and CSL, it has become less than 7% of the market capitalisation of the S&P/ASX 200, which is a good thing.

 

In the US overnight, oil prices rose as output of shale oil actually decreased. That helped the stock market, as beaten up oil companies got a lift. This comes as a number of my market whisperers are talking Santos up, so it will probably do OK today.

As the above list shows, there are plenty of headwinds for stocks to battle to see their share prices rise but there are more issues such as:

  • When will the Fed raise interest rates — June, September or 2016? When the market thinks this event is close, there could be a big sell off.
  • We have the next RBA meeting on rates on the Tuesday before the Budget. Both these events could hurt or help stocks here. If there’s a cut in May, then stocks should beat the 6000 level on the S&P/ASX 200. Without a cut, stocks are likely to fall, and more market focus is then put on the Budget.
  • The media reaction to the Budget on the second Tuesday in May will have a big impact on both business and consumer confidence. The former lifted a little in March, with the NAB reading going from -0.1 points to +2.5 points but the long-term average is +5.8 points. We have a long way to go before the business mindset looks firmly positive.
  • And this event could lead to another event — a leadership challenge. If this happens, then the conclusion would have to be that the Budget spooked business and consumers and the Coalition thought it was time for a new leader and Treasurer. If this happens, I reckon stocks will take a dive.

As you can see, there are plenty of reasons why a smart investor, who has made a nice profit in the first four months of 2015, could easily decide to sell in May (or even before) and go away until a bit of an overdue stock market clean out happens.
Of course, if it does work out that way, I’ll call it a buying opportunity as I think economies are heading up and that will help stocks over time.

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