As I always argue, an event from left field, sometimes called an X-factor, which most can’t see coming, can always happen. However, after years of watching markets, we are nearly always in times where there is good reason for the cautious to be too wary and for the cockeyed optimists to be too confident.
For me, Lehman Brothers was such an event — I didn’t think a US administration would let a too big to fail financial institution go under. It was not a clever move but the total fear that came out of that decision galvanized world governments’ resolve to stand behind their banks.
That made me more confident that we could muddle through this and that turned me from bloody worried, while not at a wrist-cutting stage like some commentators, to being more positive.
What I am saying is this — I might be positive but I am always looking for a game changer either way. If I had to change my attitude because the facts tell me to, then I would change. The facts tell me that the muddle through process is working.
Given the role of Wall Street in dictating market direction worldwide, I keep my focus there. China, India and a lot of Asia are growing nicely and assure Australia’s economic future lies a long way from recession. However, the USA remains more questionable and that’s why the Dow was up about 12 points over the weekend while the S&P 500 and Nasdaq were just down.
Sales and confidence
All the signals are mixed but tending to be more positive than negative. For example, retail sales in America came in better than expected while consumer sentiment was down slightly.
Retail sales grew 0.3 percent in February despite a drop in auto sales and business beating snowstorms. If you cut car sales out of the numbers then retail sales rose an impressive 0.8 per cent. The experts tipped a fall!
Meanwhile consumer sentiment from Thomson Reuters/University of Michigan fell to 72.5 in mid- March from 73.6 in February against economist’s expectations of a rise to 74.
More good news
On the good news front and the bank index rose strongly for the week with Citigroup up about 14 per cent for the week. Financials are doing well and defying the anti-bank call of banking analyst Meredith Whitney, who expected a bank sell off.
Her thoughts were linked to banks’ inability to make money and it had to be because of a weakening economy and balance sheet problems, but they are not materialising at the moment.
Adding to a better outlook is a meeting expected early this week, which will outline the rescue plan for the Greek Government. No money has been earmarked but the bottom line is that given Greece’s commitment to reign in its budget deficit from 12.7 per cent of GDP to 8.7 per cent, its European buddies could have 25 billion euros in the kitty for them if they need it.
On Friday night, advancing stocks beat decliners by five to four and that sums up the battle of sentiment. On the good side, lots of money or liquidity is meeting low volatility, which is a proxy for fear.
Last week, I said the US consumer and the health of the housing sector have to get stronger to win more cautious people over. Consumers did well in February but March sentiment was down. On the other hand, housing has a way to go before I can get comfortable.
That said, given that most analysts tip the stock market rises by 10 to 20 per cent this year, given what I am seeing, it all looks believable.
The day the data changes my mind, you will be the first to hear about it.
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