Do you remember what we wrote last week?
We said if the Australian stock market didn’t do as we expect we’d end up with a lot of egg on our face.
We also said you could ‘hold the eggs’ because the Australian market would have a year-end rally.
Well, get those eggs ready to fling in our general direction. If the folks at Goldman Sachs are right, 2014 could be a tough year for the Australian economy and Australian stocks.
But then again, from an economic standpoint everyone pretty much knew that right? So is Goldman Sachs revealing anything new? We’ll give you our take below…
CNBC reports on the Goldman Sachs research note:
‘As the global economy continues to recover next year Australia will be left behind, according to Goldman Sachs, which tips it as the only developed market likely to see lower growth.
‘In a portfolio strategy research note published Monday, the global investment bank said they expect the world’s 12th largest economy to expand by 2 percent next year, slower than the consensus expectation of around 2.5 percent and down from 3.8 percent in 2012.‘
In other words, the Australian economy will grow, but not by as much as many had thought. But here’s the thing. We’re not convinced anyone in the mainstream really believed that the Australian economy was heading for stellar growth.
That explains why Australian stocks have lagged other markets for the best part of three years. Confirmation of that view is in another quote from CNBC…
Too Many ‘Crash Chasers’
The CNBC report goes on:
‘With 22 years of consecutive growth Australia was the envy of the developed world, however many analysts have turned bearish on the economy amid a number of worrying headwinds. The most prominent concern has centered on the slowdown in the country’s once booming mining sector, caused by declining demand from its major trading partner China. Many worry that Australia’s non-mining sectors will not be able to pick up the slack.‘
We’ve bolded the key part. The increase in bearish views on the Australian economy is something we’ve pointed out for well over a year. Having failed to predict the 2008 crash, there are now legions of ‘Crash Chasers’ trying to make a name by predicting the next one.
But here’s the problem for the ‘Crash Chasers’ – crashes tend not to happen when people expect a crash. Most crashes come from nowhere, with just a few on the fringe predicting them.
Those predicting a crash then don’t get many column inches in the press or airtime on national TV. And if they do it’s only so the mainstream columnist or host can laugh at the ‘lunatic from the fringe’.
Think back to the 2008 crash. We remember it well. The market slowly went down during the first eight months of 2008. Analysts were sure it was just a short-term drop and that there was nothing to worry about.
Contrast that to today, when most analysts see nothing but bad news for the economy and bad news for stocks. When everyone is taking the normally contrarian view (that the market will crash), you can bet your bottom dollar it’s not a real contrarian view anymore…it’s a mainstream view.
And that’s exactly why we say a stock rebound and rally to a record high in 2015 isn’t just possible, or even probable…it’s darn near a certainty.
The Market in a State of Surprise?
What most folks forget (and this is surprising because it’s an investing basic) is that stock prices simply represent the price of future company earnings.
Yet most investors seem to worry more about yesterday’s or today’s earnings.
Not only that, but most mainstream investors appear to believe the market is always in a state of surprise. They assume that just because they can’t think any further into the future than next week, that other folks can’t either.
The report from Goldman Sachs isn’t a surprise. In many ways the Goldman’s report probably paints a picture of the obvious.
But how much of this have investors already factored into stock prices? In other words, have stock prices failed to follow pace with overseas markets because investors expected lower growth anyway?
If so, it tells you that the market is now looking further ahead. The fact is that the Goldman Sachs report is just about useless to investors today. We’re looking at the potential for the market to rally through next year based on projected earnings for 2015 and 2016.
If you’re after a contrarian view…a view that seeks to predict the next market move before it happens, then this is it: a stock rally next year.
As for the idea of a major crash on the Australian market, we’ll cop it if we’re wrong (although you could take advantage of rising and falling prices here). As far as we’re concerned, predicting a crash is about as obvious and non-contrarian as it gets.
You can still hold those eggs. We haven’t seen anything yet to change our view on a stock rally through next year.
Cheers,
Kris+
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