It’s not much, but it’s a start.
After weeks of bad news, the market got something to cheer about.
The Australian share market gained 52 points yesterday.
It turns out that things may not be so bad in China after all.
But the S&P/ASX 200 index is still more than 200 points below where it started the month.
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Can we say that this is the turnaround? Or is yesterday’s rise the proverbial ‘dead cat bounce’ with further falls to come…?
It’s hard to think of a time when there has been so much negativity about the Australian economy and markets.
Everywhere we look it’s one bad news bear after another.
We’re not saying everything is perfect. Everything isn’t. When iron ore falls 40% in a few months without a similar fall in costs, it naturally means lower profits for Aussie miners.
But remember, one firm’s profit squeeze is potentially another firm’s profit gain. Who’s to say that lower iron ore prices won’t have a positive impact on the Aussie and world economy?
Besides, just because someone says the market will crash doesn’t mean it will.
Can’t get it right every time
For an example of the gloominess hitting the Australian share market, check out this tale of woe from the Financial Times:
‘This week Roubini Global Economics predicted a slowdown in China and a tough federal budget could cut Australia’s growth to 2 per cent of gross domestic product in 2015, down from about 3 per cent. It says that this could prompt interest rate cuts and a 20 per cent slide in the value of the Australian dollar.’
Nouriel Roubini was one of the well known economists to predict the 2008 financial meltdown. That’s a pretty good feather in his cap. So people tend to take notice when he says something.
However, since then, his record for predicting crashes hasn’t been so sharp. As CBS News notes, on 26 March 2009, Roubini made the following prediction for the US market:
‘U.S. stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009.’
Of course, the opposite happened. As it happened the US S&P 500 index gained 43.5% through to the end of that year.
He did it again in May 2010, saying that ‘things [are] getting worse.’ But things didn’t get worse…not for stock investors anyway. Over the next year, the S&P 500 gained 17.4%.
Then in July 2012, Roubini repeated his claim from the previous year that 2013 would bring a ‘perfect storm’ for the markets.
According to a Reuters report in July 2012:
‘Roubini’s gloomy 2013 outlook isn’t new, but it’s getting more purchase as slowing economies and Europe’s debt crisis drive turbulence in financial markets.
‘After what he expects will be a flat year for U.S. stocks in 2012, Roubini said the equity market could face a sharp correction next year, with little the Federal Reserve can do to stop it.’
If by ‘flat’, Mr Roubini meant that the US market would gain 11.5% in 2012, then he was right. And if by a ‘sharp correction’ for 2013, he meant that the market would go up 31.3%, then he was right again.
But you know that’s not what he meant.
Look, we’re all in favour of folks making predictions. We do a fair share of that ourselves. And we don’t always get things right. Maybe Mr Roubini’s perfect storm will come. And maybe he’s right about the Aussie economy and the Aussie dollar.
But with a record of one-out-of-three at the moment, we’re in no rush to stand alongside his current prediction.
Can the market rebound again?
We were thinking yesterday’s rebound in the Aussie market was positive. But then the European markets opened.
The UK FTSE 100 index fell 1.4%. France’s CAC 40 index dropped 1.9%. And Germany’s DAX index fell 1.6%.
So much for that rebound. And the Aussie market looks set to resume falls today. It looks like yesterday was a ‘dead cat bounce’ after all.
However, it always pays to put things in perspective. That’s something you won’t get from the mainstream media, which jumps from bullish to bearish according to which way the wind blows.
Remember, it’s not the first time this year Aussie stocks have taken a beating. As the following chart shows:
What investors have to figure out is whether this is as bad as it gets or if further falls are in order.
Our bet is that this is the big shakeout the market has been building up to for the past six months. If we had to put money on it, we would look for opportunities to put more money into stocks.
The best way right now is to look at the SPDR S&P/ASX 200 Fund [ASX:STW]. It trades on the ASX just like a normal share, and gives you exposure to the Aussie market’s top 200 stocks. If the market rebounds, then this fund should reflect the performance of the index.
A return to the early August high could result in a nice 5% or so gain. That’s not so bad for a relatively conservative investment.
Of course, nothing is certain. Stocks could fall further. That’s the risk of investing. The question you need to ask is whether you’re happy to buy into the stock market at this level for the longer term, even if stock prices fall further in the shorter term.
Cheers,
Kris+
The post Stocks Are Down, Here’s How to Profit from the Rebound… appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
