29 March 2024
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If you’ve bought in and gained and don’t want to sell your shares, make sure they’re companies that are worth keeping company with.

The stock market is on fire but be careful, you could get burnt!

Peter Switzer
10 June 2020

Anyone scratching their head wondering how the stock market could be rebounding so strongly (with the economy still operating on a home-captured workforce and restrictions on normal business) needs to know that the economic outlook is on the improve and the Treasury boss who advises the country’s Treasurer, Josh Frydenberg has backed away from his 10% unemployment call.

At the height of the Coronavirus fears, Treasury speculated that unemployment would top out at 10% but now Treasury head, Dr Steve Kennedy, has pulled it back to 8%.

Let’s convert economics into real world stories.

So a 10% jobless rate means approximately 1.2 million Aussies out of work. If this ends up being 8%, it means 960,00 people jobless so that saves 240,000 workers’ jobs.

The beauty of all these revised economic forecasts, which were always just guesses (as no economist can comprehend a pandemic and what it does to an economy) could end up being better than what Doc Kennedy is now saying.

Of course, they could be worse but only a serious second wave of infections will send economic forecasts down and stock prices will go down with them.

Right now the economic news is promising and the Morrison Government isn’t giving up on throwing stimulus at the economy to keep things positive.

Today we learnt that the Government will suspend their annual uplift in PAYG tax payments for businesses and high net worth individuals to ensure cash flow remains helpful for potential spending. Taxes take money out of the economy and this is the time for injections of dough, not ATO leakages.

Last week, we heard about the HomeBuilder grant that wasn’t as good as it could be. But I’ve heard a lot of home and land packages businesses have received a flood of inquiries, so it’s bound to be a plus rather than a negative for the economy.

Watching the Treasurer and what he keeps on giving, for example, the JobKeeper payments and what he takes over the next few months will be critical to how fast the economy grows, how high unemployment goes and what happens to stock prices.

Yesterday we got a very good business confidence number, with the NAB index rising by a record 25.5 points to -20 points in May. While the long-term average is 5.2 points, confidence had previously hit record lows of -65.2 in March. This rebound is a good sign for anyone hoping that normalcy eventually shows up.

This business pickup is a long way behind consumer confidence, which has been rising for 9 weeks in a row on the ANZ/Roy Morgan reading. And I reckon today we’ll probably find it has gone up for 10 weeks on a trot.

Watching the data that tells us what’s going on now is more important than looking in the rear vision at bad and scary data for April and May.

Not surprisingly, Labor’s leader Anthony Albanese is claiming if the Government went early with the stimulus package, we might have avoided a negative 0.3% number for the March quarter economic growth result. This might have then KO’d the technical recession that’s certain once we get the June quarter growth number.

Economically-speaking he could be right but WHO didn’t declare a global pandemic until March 12, so it’s inconceivable that any government could’ve got money and policies out there in 19 days to ensure the March quarter ended up being positive.

Politicians have to play politics and it’s a sign that the economy is improving because Albo didn’t do any sniping when the you-know-what hit the fan in late March. But because he’s now starting to bag the Government, it must mean his number crunchers are telling him it’s safe to start finding fault with now-loved ScoMo, who led us out of the Coronavirus crisis.

So what should you be worried about? Try these:

• A stock market pullback because company profit outlooks could soon suggest that we have gone too far in buying shares and bidding up prices.

• Our market rebound is now 35% and history says our market rebounds between 30% and 80% after a crash, so we are in the ‘be careful’ zone.

• The best time to buy was March 23 — that’s when the rebound started.

• The next two months will be the best test for second-wave infection threats. If we beat them, stocks could have another surge.

• US reporting season starts soon and this could bring some hitherto not thought about bad news for certain companies.

• This is the first crash and rebound, where a lot of retail investors have used their online broker accounts to participate in this rally. There could be a bit of inexperience driving stock prices very high.

• And then there’s Donald Trump and his battle with China. I don’t think he would want to rattle Wall Street and global stock markets but it can be silly to ignore what thus guy can do and get away with.

I’m really happy about the economic rebound and the stock market’s resurgence but be aware that with shares, profit-takers can force prices down. That said, I’m next expecting any huge leg down.

Last Monday in the Switzer Report, I tagged four stocks that I’ve labelled the Z.E.E.T stocks (Zip Co, ELMO, EML, Tyro) as I saw them as good new age tech-like stocks that could become the next WAAAX stocks that have done well over the past three years.

ZEET were up 22% in a week, with Zip Co up 75%, which is huge and unbelievable!

But be aware that a lot of smart fund managers, including great investors like Warren Buffett, look like they’ve been outplayed by amateur stock players who have bought into this great rally, while they’ve held cash.

My advice is that if you’ve bought in and gained and don’t want to sell your shares, make sure that they’re companies that will be good long-term performers. That means if a surprise big sell off happens, you can buy more of these great companies, that in the fullness of time will justify your financial commitment to them.

Let’s hope that doesn’t come to pass.

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