What a ‘nice’ lady.
She’s even nicer than the ‘nice’ man before her.
She sits at a table, with the eyes of the world upon her.
The world waits. What will she say?
She says exactly what the world wants to hear, and the stock market goes up.
Thank you very much Dr Janet Yellen…
Yesterday was the new US Federal Reserve chairman’s first testimony to the US Congress as chairman. It was the first time she faced Congress after taking over from the ‘nice’ man (for stocks) Dr Ben S Bernanke.
The cross-examinations by the congress take forever. The problem is that rather than just asking questions the pollies insist on making long-winded statements first.
They do that so their local news networks can carry the footage of their ‘hard working’ representative grilling the bureaucracy.
But despite how long these things take, there was only one sentence investors wanted to hear. The rest was surplus to requirements.
Recession Ahead: Stocks Rise
This is the only thing the markets wanted to hear from Dr Yellen:
‘That said, [bond] purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.‘
That’s all. Nothing else really mattered. All the markets want to know is that, if the US or global economy goes a bit wobbly this year, the Fed will keep up its bond-buying program.
Dr Yellen confirmed as much with the comment that the program isn’t on a ‘preset course‘. Stocks loved it.
US stocks loved it. Aussie stocks loved it.
And when news broke that the US House of Representatives had agreed to extend the Debt Ceiling through to March next year, stocks loved it even more.
The S&P/ASX 200 index gained 55.6 points yesterday, meaning that it’s now only down 0.79% for the year.
But hang on a minute. Didn’t Toyota [NYSE:TM] this week announce it planned to stop making cars in Australia in 2017?
Isn’t that only a few months after General Motors [NYSE:GM] and Ford [NYSE:F] announced the same thing?
Doesn’t this mean that 200,000-plus people will be out of work, dragging down the Aussie economy, and pushing it into recession?
If so, that would be the first time in 22 years that the Aussie economy has gone backwards. Troubling times.
But if things are potentially that bad, why on earth would stocks keep going up? The Aussie market has gained nearly 100 points since Toyota’s apparently disastrous decision.
What explains it?
Looking One Step Ahead
You can never be 100% certain about what drives a market higher or lower. Commentators and analysts will try to give explanations, but it’s mostly guesswork.
And you can put your editor in with the guessers too.
We’ve got an idea why Aussie stocks are going higher, but we don’t know for certain.
The important thing is to remember what we’ve mentioned before. It’s that investors are always looking ahead. One possible reason why Aussie stocks didn’t do as well as US, UK or Japanese stocks in 2013 is that investors were worried about a slower Aussie economy and the prospects of a lower Aussie dollar.
Put simply, foreign investors were reluctant to invest in Aussie assets because they thought the Aussie dollar could fall. That’s because when they came to change back to their domestic currency the lower Aussie dollar would buy less of their domestic currency, which would mean a losing trade.
However, now the Aussie dollar has fallen, and now there is an immediate – but not long-term – negative view of the Aussie economy, investors are starting to look past the short term and think about the long term.
In other words, investors have already priced in the negative news about the Aussie economy. Now they’re figuring out which investments to buy before the economy starts to boom again.
A New 34-year Boom?
Now, that doesn’t mean we’re right.
It’s only guesswork. But it’s a circumstance we’ve seen many times before over the past 20 years.
It’s usually the main reason why most investors miss out on stock rallies. They read the news about recessions and job losses, and that keeps them away from investing.
Meanwhile, the investing pros have already factored in a slower economy and are looking further ahead to the time when the economy recovers.
That’s what we’re doing now. We’re looking ahead. And boy, do we like what we see in terms of long term investment opportunities.
We like the tech outlook. We like the resources outlook. We like the emerging markets outlook. Heck, if we’re honest, we like the broader global economic outlook.
Make no mistake. We’re not saying things are perfect. And we’re not saying the central banks have fixed things after the 2008 meltdown. Far from it. In fact, our view is that economically things are worse.
But there’s no doubt that governments and central banks have put the ‘inflation train’ back on the rails. That means more stimulus and money printing for years to come.
That means you could see a repeat of the period from 1974 through to 2008. That was a time when the Dow Jones Industrial Average gained 1,614%.
Just be aware: the Day of Reckoning will arrive one day. But not today. And until it does, investors have a great opportunity to make the most of some potentially spectacular returns.
Cheers,
Kris+
