31 March 2020
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This stock market sell-off will become a buying opportunity

Peter Switzer
5 February 2018

The Dow is down again big time and this is where I earn my stripes. If I’m any good at my job, I need to say one of two things here: “Sell everything and go to cash” or “Don’t worry, this is a pullback after the Yanks overbought stocks and a buying opportunity is developing.”

I’m running with the latter and here’s why:

First of all, the US stock market boomed, post-Trump’s election win. I know Donald is a political worry but he hasn’t stopped the Dow Jones Industrial Average from going up 25% last year. 

Second, Wall Street is in record high territory and hasn’t had a 5% pullback for well over 400 sessions, which has never happened before. Smart market commentators, such as Shark Tank investor Kevin O’Leary, calls it a “healthy” development because valuations for US companies had become stretched.

Third, all this fear started because the US economy is doing better than expected, with both the job-creation and wages numbers beating expectations. In January, 200,000 jobs showed up instead of the 180,000 predicted and wages grew by 2.9%, which shocked a lot of expert forecasters. 

Fourth, the above developments increased the fears of higher interest rates coming more quickly than was expected. And those short-term traders, who buy and sell all the time, would have quickly left the stock market to lock in profit but these are the types who will become buyers this week, if I’m right.

Fifth, stock markets seldom fall over on the threat of rising interest rates. Usually you get more actual rate rises, which coincide with a bit of a slowing down economy. The opposite is happening now.

Sixth, the economic outlook, not only in the USA but also worldwide (including Australia) is on the improve and there’s no evidence of a threatening economic slowdown.

This is how Paul Bloxham, chief economist at HSBC, sees it: “A wave of global growth is gaining momentum and should support Australia’s economy in a number of ways. First, commodity prices have lifted, boosting national incomes, corporate profitability, and tax revenues. 

“Second, rising global demand is supporting demand for exports of energy commodities, high-quality food products, and tourism and education. Finally, the lift in global optimism is supporting a pick-up in business conditions, driving rising local investment and hiring.”

Bloxham is very optimistic on the Oz economy compared to the consensus view and I suspect he’ll be proved right by year’s end.

HSBC thinks China will have a better-than-expected year, with growth tipped to be 6.7%, rather than the 6.4% held by the consensus.

Seventh, the legendary US investor Bill Miller made the point on CNBC that when you have a good stock market month in January, you often see a lousy February. The Yanks had a huge first month of the year.

He says if inflation goes up too quickly this year, that could rock stocks but he suspects higher rates could actually help stocks.

“The last precedent we had for this kind of move in rates was in 2013 during the so-called Taper Tantrum, when rates went from 1.66 percent to 3.25 percent in four months,” Miller recalled.

“That was the only year when money went into U.S. equity funds since the financial crisis,” he added. “The stock market went up 30 percent that year.” 

And he quite rightly pointed out that usually rising interest rates are “signaling faster economic growth”. This tends to be good for profits and then stock prices.

I haven’t checked my bank balance in my super fund in a few days, but I will today, and I’ll be buying stocks some time this week because, as I’ve said before, the fat lady is not out of the dressing room yet and her last song in this dramatic, stock market ‘opera’ is still a way off.

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