It’s not looking good.
In fact, it’s looking pretty bad.
Australian Stocks are going the wrong way.
They’re supposed to be going up.
Interest rates are low. Central banks are printing money.
Free Reports:
What’s going wrong? Maybe it’s time to admit we got it wrong. Is there any chance the S&P/ASX 200 can hit 7,000 points by early next year…?
Investing is all about future expectations.
You buy a stock now because you think the price will go up in the future.
But why do you assume the share price will go up? That’s because you believe the company will increase its profits, and perhaps its dividends.
If it does, then you’re betting that other investors will want to buy shares at a higher price. But here’s the thing. Those investors will only buy if they think the company can keep growing profits and dividends so that other investors will pay an even higher price.
That’s what keeps the stock market moving higher.
But once investors stop believing in a positive future, that’s when you get trouble.
However, it’s a mistake to see this as a sign to sell.
Remember, the price action is all about perception. Perception isn’t always reality.
Besides, this kind of soft market is what you should expect after the market performs well. When stocks do well, especially if they rise quickly, investors begin to doubt that the market can keep going up.
That’s why you tend to get a lot of the ‘crash alert’ calls when stocks make a new high.
The funny thing is that sometimes, even when companies produce better-than-expected results, the market doesn’t believe it.
Instead, the market assumes that now is the end of the company’s run of luck, and that the next results will show declining profits.
Sometimes the market is right. But sometimes it’s wrong. Sometimes, despite what investors think will happen, the opposite happens and the profits keep coming.
This happens until eventually the market can’t ignore it and investors pile back in to stocks.
We know this happens because we’ve seen it before.
We saw this play out with the US market back in 2004.
By early 2004, the US S&P 500 index had gained 35% since the March 2003 low. The US Federal Reserve had begun raising interest rates, and investors just didn’t believe stocks could keep going up.
You know the old story about the relationship between interest rates and stock prices, right? The theory is that stock prices should fall with higher interest rates, because bank deposit rates can better compete with dividend yields.
Importantly, investors didn’t believe that companies could keep increasing profits.
It took until 2005 before stocks started to take off again. Finally investors began to believe that profits and stock price could keep growing. Anyway, you know what happened next — the market rallied higher until it finally peaked in 2007.
To our mind, there isn’t much difference between what happened in the market 10 years ago and what’s happening today.
In today’s market, investors just don’t believe that good news is possible.
They assume that things will get worse before they get better. That’s why you’ve even see dividend stocks fall. Dividend stocks are supposed to be among the safest stocks on the market.
And yet, when the market fears lower profits, even the supposedly safest of stocks can take a beating.
But the comparison between 2004–2005 is relevant today. It provides proof that even with higher interest rates, stocks can still go up once the market adjusts. This is an argument resources analyst Jason Stevenson has made to his readers in recent months.
It’s a controversial view that most in the mainstream don’t agree with. But the chart above backs Jason’s view.
That said, your editor firmly believes that interest rates aren’t going anywhere. The clever (and manipulative) folks at the US Federal Reserve are continuing to play a canny game.
It’s a game of gradually boosting stock prices without creating the appearance of a bubble. To do that, the Fed has to play good cop/bad cop. The Fed has to make the market believe that interest rates could rise and that stimulus will stop.
By doing so the market will plateau and even fall for a period. Just as it has done recently. Then, once it has fallen enough — but not too far — the Fed can jump in again as saviour to prop up the market.
If you need more proof. Take this morning’s report from USA Today:
‘The Dow Jumped to a record close Wednesday after the Federal Reserve reaffirmed that a key short-term interest rate will stay near zero for a “considerable time” after its bond-buying program ends next month.’
That’s right, the Dow Jones Industrial Average closes at a new record high.
Think back as recently as a year ago. The market went into a spin with all the talk of the Fed ‘tapering’ its bond-buying program. Most analysts said stocks would crash even at the thought of it.
And yet, one year later the Dow is 12% higher. And it’s 31% higher than it was two years ago.
Of course, the Australian share market hasn’t done quite as well over the past year. Thanks to the recent fall, it’s only up 3.7%. So, is it time to abandon the 7,000 point target for next year?
After all, there’s no point being stubborn about these things. For the Aussie market to hit 7,000 points, it would need to climb 29%. That’s a tall order. But it’s not out of the question. If we had to bet on it, a reasonable person would probably put it at no more than a 5% chance.
But we’re not reasonable. We’re always looking for the events the mainstream considers impossible, but we believe to be possible…however improbable they may be. Once we find those events, we back them the whole way.
The 7,000 point target for January next year may seem impossible now, but the Fed is doing a pretty good job of manipulating this market higher. At some point, the Australian stock market will look past the immediate short-term problems in China and start focusing on the reality of long-term low interest rates and more money printing around the world.
Once it does that, you can bank on the Aussie market taking off. And if it doesn’t quite reach 7,000 points, it sure as heck could get pretty close.
We’re in no hurry to jump off this bandwagon.
Cheers,
Kris+
The post Is Our Australian Stocks 7,000 Target on the Ropes? appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
