2014 isn’t shaping up to be a very nice year for investors. A number of indicators, statistics and results are predicting a tough time. That’s especially true in the US, which leads the Australian stock market.
- The Baltic Dry Index, which measures shipping costs, is one of the few economic indicators I trust, at least a little. As trade around the world picks up, so do the costs of shipping. But the index is off to its worst start in 30 years. Shipping costs dropped 35% in two weeks! If other indicators begin showing a sudden downtrend, this could turn out to be a canary in the coal mine.
- The stock market’s statisticians are pointing to the old maxim ‘as January goes, so goes the year’. Apparently it holds true for the US stock market in particular. And January isn’t very encouraging so far, with both the Aussie and US stock index down.
- But investors are at their most bullish according to sentiment indices, and margin lending (borrowing to invest in the stock market) is at an all-time high in the US. As Warren Buffett likes to say, ‘sell when others are greedy’.
- American corporate profits are unnaturally high too, but job creation just fell to a three year low. High profits might seem good at first, but profits are ‘mean reverting’, so they could be in for a big drop.
- US corporations as a whole have stopped buying back stocks – a form of dividend where companies buy their own shares back. In other words, on a net basis they are issuing more shares than they are buying. This adds to the supply of shares in the marketplace.
If 2014 does turn out to be a bad year, the question is whether the US central bank will surprise the world by maintaining its stimulus instead of cutting it as expected. Yes, unfortunately the investing world is still dominated by ‘what are the central bankers going to do next?’ When the weekly jobs data came out with a disappointing number, the Aussie dollar jumped a cent in short order. That might reflect bets on more QE than previously expected.
Perhaps the Federal Reserve is managing expectations by threatening to taper and then not tapering. This little bait and switch trick could prolong a rally in stocks, with the market being surprised by more stimulus. It also leaves the Federal Reserve with even fewer trump cards to play. Eventually the managers of our stock markets and economies will run out of such tricks and reality will strike. That moment is far off yet though. For now, central bankers rule financial market prices.
How Australia fits into all this is a little confusing. Our currency numbs much of what goes on overseas, without Australians themselves noticing it. For example, our stock market, measured in Aussie dollars, is nowhere near its highs. But if you factor in the rise in the Aussie dollar, then our market is far higher in terms of say US dollars. Unfortunately for us Australians, that’s little comfort.
The question is if this works both ways. If the US market begins to fall, will our currency protect our stock market by falling too? Or will our shares and the currency both tumble? In short, I don’t know. But even if I thought I did know, it wouldn’t be worth relying on my predictions.
That’s why all the strategies in I’ve devised for my readers in The Money for Life Letter are not reliant on a good economy or stock market. But all of them are still affected by good and poor prospects for both. You can’t avoid that. So it’s a matter of holding onto your hats in 2014, and watching the new Federal Reserve Chairman Janet Yellen.
Contributing Editor, Money Morning
Ed Note: The above is an edited extract of an update originally published in The Money for Life Letter.