We started writing today’s Money Morning yesterday evening.
Why? It was an act of defiance.
We wanted to prove to you that the world of investing doesn’t revolve around the comings and goings of Dr Ben S Bernanke and his US Federal Reserve.
We wanted to point out that as much as central bank meddling may have a short-term impact on markets, it has nothing approaching the impact of other more exciting and important events.
And so today we wanted to wiggle our derrière in the general direction of the US Fed and ignore all things taper.
And when we woke up to the news this morning, we couldn’t help ourselves – ‘Nailed it.’ We knew there was virtually no chance the Fed would do anything to spoil the stock rally, and we were right…
See if you can pick the moment when the Federak Reserve revealed it wasn’t scaling back its bond buying program:
Source: Google Finance
Well spotted. It wasn’t that difficult was it?
What surprises us most is that so many investors appear to have been blindsided by what was completely obvious – even to an old hack like your editor.
The Fed is current part-way through a five-year experiment in irregular monetary policy principles. With the US economy and unemployment still in a mess it’s laughable to think the Fed would pull back from the brink now.
We’re certain that in their mind there is still so much more they can do. And this morning they’ve proved it.
Rates Going Nowhere
Now, this isn’t to say it was a slam-dunk. If we thought that we would have told you to bet your house on the market. But we don’t like betting on macro-economic events.
There’s no telling exactly how the market can interpret them. The one thing we’re 100% sure about is that the Fed intends to keep interest rates as low as possible for the foreseeable future.
That’s why throughout this whole mess we’ve been one of the few analysts in Australia to recommend that investors stay invested in stocks. Hopefully that approach will continue to pay dividends with a strong performance today.
All this shows you exactly why we prefer to focus on the individual companies that make up the market. You can’t know for sure on what whim the Fed will act, so it pays to not show it too much attention.
But we do know something else. Over the past two weeks and the next three weeks, nine of the Australian Small-Cap Investigator stocks picks have gone or will go ex-dividend. With a combined share price of $19.64, they’ll pay out a total of 42.25 cents in dividends.
That’s for a combined dividend yield of 2.2%.
Now, that may not seem like a bumper haul, and we’ll agree it isn’t. But when you add in capital growth plus the fact that some of these stocks have a low yield due to expectations <a
rel=”nofollow” href=”http://pro1.portphillippublishing.com.au/148477/” target=”_blank”>they’ll pay a higher dividend in the future, it’s a pretty good return.
Buy Stocks Before the Rally Ends
The reality is there are companies all over the Australian market doing, making, creating and innovating things.
They’re doing all this while bankers and bureaucrats meddle with interest rates and pull and prod the economy. Yesterday we pointed out the success of the NASDAQ index this year – one of the world’s best performing stock indices.
Well, closer to home is the S&P/ASX Emerging Companies index (blue line). This is an index of some of the smallest stocks on the Australian market. We’ve compared it to the blue chip S&P/ASX 200 index (red line):
Source: Google Finance
As you can see, small stocks have beaten big stocks hands down over the past three months. Why would that be? After all, if the market is so risky and the economy is so bad doesn’t it make more sense to buy safe blue chip stocks?
There are a number of reasons. First, small stocks tend to get unfairly hammered during a market rout. It only takes a few thousand dollars worth of shares to knock them over, and so when they recover it only takes a few thousand dollars worth of shares to pick them up again.
But secondly, these tiny companies tend to have outsized opportunities. The decision of a central banker whether or not to buy more bonds has very little impact on whether a mining company proceeds with a project or whether a medical firm invests in a new MRI machine.
Although we’ll agree there is an element of interconnectedness in the global economy, some things are less connected than others. And to a large degree what happens among Australian small-cap stocks isn’t much influenced by what goes on in the bigger world.
In short, as we’ve said for a long time, you can pay attention to the big macro-economic events, that’s fine. Just don’t assume things are about to change. Interest rates are low and they’re staying low. Got it?
Folks can carp about it as much as they like and say that it’s wrong. But that’s just the way it is. We prefer to take a different stand. Rather than carping from the sidelines we prefer to make the best out of a rotten situation. That means continuing to cautiously buy stocks that are best placed to gain from this rally.
It has been an indisputably winning strategy so far this year, and if we’re right about Australian stocks hitting 7,000 points in 2015 it’s destined to be a winning strategy for at least two more years.
Buy stocks now, before this rally ends.
Cheers,
Kris+
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