The US stock market was down overnight and it comes as the US got a weaker-than-expected manufacturing number, Donald Trump slammed steel and aluminium tariffs on Brazil and Argentina and our economy (apart from house prices) looks to be struggling.
And then there’s Donald’s ongoing battle with China on a trade deal, which wasn’t helped by his support for the Hong Kong democracy protestors. While his support might be politically and socially commendable, if it drags out and escalates a trade war leading to a stock market sell off that could trigger a crash, you might be tempted to ask: “Is Donald bonkers over Honkers?”
When it comes to investing in stocks, the big lesson is that you’re never too old to learn and sometimes you need to remember what has worked in the past often will work again. These realisations seldom leave me and given my job to guess the direction of the stock market and individual companies, I’m pondering: Should we stay in stocks right now?
I don’t like the economic readings locally and the US economy is doing OK and the latest Institute of Supply Management reading on manufacturing wasn’t great at 48.1, which was worse than expected. Any number under 50 means the sector is contracting.
Also the US stock market indexes recently have hit all-time highs, which means there are profit-takers out there (who play the stocks market on a short-term basis) who could be in a selling mood.
However, a possible trade deal signing and the recent history of stock markets will make it hard for serious players to desert stocks right now. “The trend and momentum going into December are bullish,” said Bruce Bittles, chief investment strategist at Baird to CNBC. “However, investor optimism is registering as excessive by many of the services we follow. While optimism is not euphoric, excessive investor optimism generally suggests a pause in a bull market.”
But Bittles added that the things that brought the stock market to the current highs “continue to be in place.”
While you should be nervous about stocks now, should you be a seller of stocks? This is a question I asked fund manager Charlie Aitken from Aitken Investment Management on my Investing programme on Switzer TV.
Charlie covered the getting in and out of stocks issue in the Switzer Report last week and here’s what he said: “There are very few great short-term traders in the world because successful short-term trading is counterintuitive to the basic make up of average human psychology. Great traders sell into euphoria and buy into panic. That requires a different internal setting that most individuals have available.”
And armed with that, it’s worthwhile wondering: Is December a good month to dump stocks?
He rammed home how costly it can be when you’re a getting in and getting out type when you mistime the market. Let me sum up what Charlie told me:
• If you missed just the 5 best index return days in the last 15 years, your compound annual growth rate drops from 7.1% to 4.8%.
• If you missed just the 10 best index return days in the last 15 years, your compound annual growth rate drops from 7.1% to 3.1%.
• If you missed just the 20 best index return days in the last 15 years, your compound annual growth rate drops from 7.1% to 0.8%, or less than inflation at 1.7%, a negative real return.
• If you missed just the 30 best index return days in the last 15 years, your compound annual growth rate drops from 7.1% to -1.1%, negative absolute and real returns.
Using the MSCI World Net Total Return Index (USD) over the last 15 years, Charlie said “the compound average growth rate it delivered was 7.1% p.a.” and makes the case for time in the market rather than trying to time the market.
And the next question is: Does history tell you that December is a great month to get scared and dump stocks? A few years back I interviewed Sam Stovall in New York when I took my TV show to Wall Street.
Sam was at S&P then but now is at Bespoke and he’s a stock market historian, apart from other investment research functions he’s strong on.
“December is the best month of the year,” he told CNBC. “The S&P is up 1.6% on average. It also has the highest frequency of advances, up 76% of the time.”
However, he did say there is often a mid-month sell off but then a Santa Claus rally often kicks in towards the end of the month, so any notable fall in stocks in December is often “a buying opportunity.”
But wait there’s more from history.
“Since 1928, when stocks are up 20% or more by Thanksgiving, like this year, the S&P 500 usually ends the year even higher, with an average gain of 1.8% between Black Friday and New Year’s Eve, Bespoke noted,” CNBC’s Patti Domm wrote last week.
On top of that, the period November to April between 1998 and 2012 and across 37 stock markets showed a 10.6% gain, while the period May to October only returned 0.95%.
Provided Donald doesn’t let his bonkers over Honkers tendency get out of hand and a trade deal happens before Santa starts loading up the sleigh, I think stock players are in for a good Christmas.
However, with the economic stories in Australia in particular and to a lesser extent in the US, not as good as I’d like, the last thing we need is another Trump trade deal delay laced with promises of tariff escalations.
And remember, if no deal is likely and China is still playing hardball on December 15, new tariffs will apply and this won’t be great for the stock market.
I’m not trying to time the market. History tells me not to do this. But the way things are playing out, I have to say I’m tempted.
But let me make it clear, I’m siding with history on this one.
If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.