So far it has been a bad week for Australian stocks.
The S&P/ASX 200 has lost 93 points since last Friday. That’s nearly a 2% drop.
So, what’s going on? What does this mean for our 6,000 point year-end target?
If the market doesn’t hit our target, it could leave your editor with a big dollop of egg on our face.
But wait. Outgoing US Federal Reserve chairman Dr Ben S Bernanke speaks. It turns out he’s confirmed what we’ve known all along.
You better put those eggs on hold…
We’ve gone on record throughout this year, trying to convince you that central banks have no intention of raising interest rates.
How long they’ll keep them low is anyone’s guess. Our bet is you can measure it in years. But even that may not be a long enough timescale.
It’s quite possible that the central banks think they can keep interest rates low for…well…forever.
The clue is in a comment from Fed chairman Dr Bernanke, as reported by Bloomberg News:
‘“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches the Fed’s 6.5 percent threshold.‘
OK, maybe not forever. But now do you believe what we’ve said on this?
Stocks Pause for ‘Thinking Time’
However, we’ll stop the self-congratulation for a moment.
Being right is only half the story. We’re not involved in the financial markets as an academic exercise or to score points.
We’re in the financial markets to identify trends and then recommend specific investments. And ultimately to help our readers make money.
That hasn’t happened this week as the market has fallen 93 points. So, should you get those eggs ready again? Not so fast.
Our view is the market and investors are going through the usual period of self-doubt after hitting a new high point (we’re talking specifically about the US market here).
That’s only natural. When the market breaks a record, investors begin to wonder about the sustainability of the current gains and whether it’s possible the market can go any further.
It’s quite normal to see stocks trade around a key level as investors and traders weigh up valuations – are stocks still cheap, fairly priced, or are they overvalued?
Investors ask those questions all the time, and rightly so.
You can see from the following chart that a similar dance played out with the Dow Jones Industrial Average for most of the second half of this year:
It wasn’t until the fourth time of trying that the Dow finally broke through 15,500 points and stayed above it.
Australian Stocks Still Heading for a 10% Gain
Now the Dow is flirting with 16,000 points. This is another key psychological level. It broke through on Monday but failed to stay above it.
It traded above that level again on Tuesday. But once more it failed to stay above the line.
And while we always prefer to see stock markets going up, you shouldn’t panic when stocks have a few days of falls. Remember that the Dow has gained around 600 points – about 4% – over the past month.
So if it gives up a few points, so what?
The same goes for the Australian market. Sure it has lost 93 points in less than a week. But it’s still 150 points higher than it was in early October. And even if the market gives up that gain, the S&P/ASX 200 would still be almost 500 points higher than it was at the start of the year.
The bottom line is this: despite the volatility we still don’t see that anything has changed. Dr Bernanke has confirmed our view – interest rates aren’t going anywhere.
And when the market finally gets that, you’ll see stocks break out of this funk and move higher. So we’re sticking with the game plan.
This is Part of the Federal Reserve’s Plan
Whether you stick to the game plan of buying stocks on these dips is up to you.
We certainly are. As always it’s a risk. Even if the market rallies, not all stocks will achieve the same gains. Some may even fall. So it pays to put in the research to give you a better chance of backing a winning stock.
It was a big risk telling you to buy stocks through May and June when the market slumped 10% in a few short weeks.
But at the time our research and analysis suggested it was the right thing. And we’ve got the same conviction right now.
Remember (and this is the key point) that while the Federal Reserve and other central banks want stocks to go higher, they don’t want them going too high too soon. They’re trying to manipulate prices to achieve slow and steady price growth over time.
So far this year the US market has gained 21%. Is that enough for the Fed? Maybe they will be happy for a 30% gain this year. One thing we’re certain of is that Dr Bernanke won’t do anything to spoil his perceived legacy as he enters the last two months as head of the Fed.
As we see it, while it wouldn’t have been great to see your portfolio take a hit this week, the plus side is that if you have cash available to top up your holdings, now is as good a time as any.
It’s a punt, but if you can cope with the volatility, it’s worth the risk.