Face, meet egg.
Following a disappointing November, stocks continue to fall in December.
Our year-end target of 6,000 points for the S&P/ASX 200 is now a distant light on the horizon.
To get there we’d need to see an 856 point jump, or a 16.6% gain.
So you now have permission to throw an egg in our general direction – preferably not rotten or hard-boiled.
After all, a big double-digit percentage gain in the space of just three weeks hardly seems possible.
And yet, it’s not entirely impossible…
OK, we’re grasping at straws. We’d love it if stocks defied the odds and soared as the year drew to a close.
If you remember back to the depths of the market in March 2009 you’ll recall the blue-chip index gained 16.8% in three weeks. That hardly seemed likely back then, when most thought the world was about to end.
Small-cap stocks did even better. Especially those with a good story to tell about innovation and game-changing technology.
Of course, that was a one-off event, wasn’t it?
No End to the Low Interest Rate Story
Not quite.
In July that year Australian stocks gained 13%.
And between then and today there are many other times when stocks gained 6% or more in short order.
Importantly, there are many examples of the Australian market doing what it has done over the past six weeks – fall by 5.5%. Why is that important? Because it shows you that, despite what appears to be catastrophic falls, the market has shown a tendency to recover.
Now, we get it. We get that many of those recoveries have been due to stimulus measures; namely central bank money printing and artificially low interest rates.
The point we’ll make is, do you think that any of that is about to end?
Do you really think central banks will stop printing money, risking a collapse into economic recession?
And do you really think the same central banks will suddenly reverse course and begin raising interest rates after spending the past five years holding them down?
If you answer yes to those questions then all we can say is that you really haven’t been paying attention.
If you answer no to those questions then your decision as an investor is plain and simple: when the market falls 5-10% you should see this as an opportunity to buy stocks rather than sell stocks.
Stocks Beat Gold – Again…
It amuses us that some of the biggest gloating about the recent drop in stock prices has come from gold investors.
Not that we’ve got anything against gold or gold investors.
We explained yesterday that we’re still as big a fan of gold as we’ve ever been. That’s not about to change. But for gold investors to try and stick it to stock investors is a bit rich.
After all, as far as a comparative performance goes for this year, even after the recent fall for stocks, the Aussie blue-chip index is still up by 10.7% for the year. Compare that to the Aussie dollar gold price, which is down 15.9%. This should be the second year in a row that stocks beat gold.
To be fair, we’re making a bit of a false argument. We don’t believe investors should choose between stocks or gold. We say investors should hold a big chunk of shares for wealth accumulation and a big chunk of gold as protection against government and central bank meddling.
But the fact is that stocks (and gold) never rise or fall in a straight line. You know that by now. That means you have to use price dips like this as an opportunity to buy stocks you thought were too expensive three or four weeks ago.
And yet, we know that now stocks have fallen, most investors will lose their bottle and stay on the sidelines…until stocks have gained 5%. Then they’ll buy!
The Boost You’ve Waited For
It’s all part of the general psychology of most investors.
It’s part of what makes a bull market a bull market. In truth, we’re glad those investors exist because they help push stocks higher than they otherwise should go.
While we’re grateful for those investors, we’d rather you weren’t one of them. Those investors are the type who look at the market and claim it’s too expensive. When stocks fall 5-10% they then say stocks are going lower, so they still don’t buy.
The only time they’ll buy into the market is when stock prices have gained 5, 10, 15 or 20%. Then when they’re afraid of missing out they’ll find some justification for paying a high price for stocks…just as the market hits the top.
Look, it’s OK to be nervous about the stock market. After five years of painstakingly rebuilding your investments, the last thing you want to do is watch it all go down the drain again.
But as we’ve warned before, as an investor you really don’t have any other choice than to play the stock markets. Interest rates are destined to stay near record lows. And our bet is, despite the noise coming from the US Federal Reserve, it will next week dismiss any talk of reducing its asset purchase program.
If so, it would give stocks the boost we’ve been waiting for. It may not be enough to get the Aussie index up to 6,000 points, but that’s OK. Because regardless of short-term goals, the long-term story remains the same: low interest rates and money printing equals a boom time for stock prices.
The biggest damage you can do to your wealth right now isn’t to buy stocks; it’s to think that you’re protecting your wealth by staying in cash.
Cheers,
Kris+
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