Local doomsday merchants got a statistical kick in the pants this week when the OECD gave the Aussie economy a big tick, claiming that our economy will contract by only 0.3 per cent this year but will roar back to solid growth next year, with a 2.4 per cent figure tipped.
But the even better news from the Paris-based think tank is that unemployment in Australia will peak at 7.9 per cent next year, rather than the 8.5 per cent predicted in the Budget.
All up, recent economic and business news is telling me that long-term investors should be thinking about having a look at shares as a way to build their wealth bottom lines.
Update on America
Let’s have a look at the latest revelations from the place where most of our economic and market problems began — America.
In the USA, the big news was that the Federal Reserve is not jumping to raise interest rates too soon. Despite the fact that the world’s biggest economy is starting to free itself from recession, the central bank thinks there is still some time to go before the Yanks are out of the woods, and that means interest rate rises will have to wait.
The power of ‘can do’
That’s great news, however, an old carpet watcher says the US recovery will happen and warns everyone not to underestimate this country of ‘can do’ merchants. He also warns that inflation will come, which always forces up interest rates and hurts economic recoveries, but he thinks this unwanted development could be some time off.
Typically, most news outlets preferred to run hard with Warren Buffett’s prediction that the US will have to face inflation down the track, but if you go to his interview on Fox Business, you’ll find he suggests this could happen in three years time. He thinks the US is on the mend and that the Obama Administration is doing the right thing by the economy but the housing sector, which is crucial for the recovery, has not yet turned the corner.
The Dunny Index!
Buffett says he is a big watcher of carpet sales as this is a great indicator of how housing is going — a new house needs new carpet.
(In Australia, I look at my own creation — the Dunny Index — and this looks at the orders for Portaloos, which builders need on site at the start of a project.)
Not a big US slide
Back to America, and while it is expected that a pullback will happen for the stock market on Wall Street after the latest 30 per cent plus rally, few think the market index will fall by anything more than 10 to15 per cent. By the way, this could be overdone negativity.
In case you are wondering, Wall Street is bound to keep leading the local market, though I think over time our shares will do better than our US counterparts because of our link to China, and Asia generally.
Short term and long term
For the short-term investor jumping into shares, now is a gamble after such a big rally, though I do think the market will be higher by Christmas. On the other hand, the long-term investor, who has a three- to five-year horizon, has a great opportunity to buy stocks that are bound to do well from these still beaten-up levels. Remember, shares fell over 50 per cent during the crash and have since risen about 30 per cent, however that doesn’t mean we’re only down 20 per cent on the market.
Let me give you a little lesson, which surprises novices to stocks.
When the market started to slump, the All Ords index was around 6,700. If this lost 50 per cent, it fell to 3,350. If we have risen 30 per cent, that takes us to 4,355 but this is still 35 per cent short of 6,700. This means someone’s portfolio of shares could still be 35 per cent lower than it was before the crash.
The 50 per cent fall was from a bigger amount — 6,700 — while the rise of 30 per cent was off a smaller amount of 3,350.
My favourite stocks are those in the top 30 or 40 in terms of market value. These are some of the best business names in Australia. Some great miners will be good value and so are those with a history of paying dividends.
The beauty of the dividend
You know, some experts say that shares average returns of around 10 to12 per cent, but history shows that half of the returns from shares comes from dividends. That’s why I look for good dividend payers.
Switzer on TV
Over the next few months, I’m going to create my favourite portfolio of stocks using some of the country’s best stockbrokers. These people are coming on my new TV show called SWITZER on Sky Business — from Monday to Thursday at 7 to 8pm and repeated at 9 to10pm.
Hope you can join us to see how we build the portfolio, but I’ll make sure it will also be here on my website. Good luck with your money life ahead!