More than once we’ve explained that it’s important to make predictions when investing.
If you don’t make predictions you’re flying blind with your investments.
You need to predict what you think will happen to a share price…to a sector…to an entire economy.
So folks who say that making predictions about the future is pointless are fools. What would they suggest investors try to predict? The past?
No, you’ve got to predict. And regardless of whether you get the prediction right or wrong, it at least means that you’ve weighed up all the possibilities about what could happen next.
So, what will happen next?
We’ll get to what happens next in a moment.
But when it comes to predictions there aren’t many with a better record of getting them right than our old pal Dan Denning.
In 2007 he told readers of his investment advisory service to sell US stocks just before the market hit the record high and then collapsed. It was a prescient move.
At the end of 2012 he told readers of The Denning Report that the market would likely shift from bonds to stocks in order to benefit from falling interest rates and higher dividend yields. That was pretty much the start of the rally that took stocks to multi-year highs in 2013.
Now Dan is back with his predictions for 2014. You shouldn’t miss his take on where stocks are going next. Go here for more.
Who Says the Fed is Giving up on Stimulus?
As for our view, nothing much has changed.
Our bet remains that Aussie and global stocks have barely started what could be a multi-year (perhaps even a multi-decade) stock rally.
The fact that the Aussie market has lagged many other markets only confirms our belief that the Aussie market has plenty of ground to make up over other national stock markets. That’s why we’re betting on the Aussie market having a standout year in 2014.
But that doesn’t mean it will be risk-free returns. Stories such as this from Bloomberg News suggest we’re still in for a volatile time:
‘The Federal Reserve will stick to its plan for a gradual reduction in bond purchases, economists said after a government report showed that U.S. employment rose at the slowest pace in three years in December.
‘The Fed will reduce purchases by $10 billion at each of the next six meetings this year before ending the program in October, according to the median forecasts of 42 economists in a Bloomberg survey.‘
Suppose the Federal Reserve does cut back its current bond-buying program to zero; it still means the Fed will buy a heck of a lot of bonds between now and October. Let’s do some rough maths. The Fed doesn’t meet on a regular monthly schedule like the Reserve Bank of Australia. The Federal Open Markets Committee (the body that sets the Fed’s interest rate target) meets eight times per year, at roughly six week intervals.
If the Federal Reserve began cutting back its spending each month, here’s how it would pan out:
January – buys US$75 billion – cuts program for February to US$65 billion
February – buys US$65 billion – FOMC doesn’t meet
March – buys US$65 billion – cuts program for April to US$55 billion
April – buys US$55 billion – cuts program for May to US$45 billion
May – buys US$45 billion – FOMC doesn’t meet
June – buys US$45 billion – cuts program for July to US$35 billion
July – buys US$35 billion – cuts program for August to US$25 billion
August – buys US$25 billion – FOMC doesn’t meet
September – buys US$25 billion – cuts program for October to US$15 billion
October – buys US$15 billion – cuts program for November to zero
The cumulative amount of bonds the Fed will buy between now and October would be US$450 billion.
Once again, that’s US$450 billion. Put another way, that a hair’s breadth short of half a trillion dollars. Perhaps you see now why we laugh at the notion that the Fed is somehow cutting the markets adrift.
And remember, this assumes that the Fed follows the expected plan and cuts by US$10 billion at every single meeting. In our view there’s a better than even chance that the Fed doesn’t cut at all some months, just to show the market that it’s ready to step back in and support if necessary.
Bigger Than TARP
We’ll put it another way to make our point.
Do you remember TARP (Trouble Asset Relief Program) back in 2008? It was the big scheme put in place by former US president George W Bush and his Treasury Secretary Hank Paulson.
At the time, the size of the program stunned everyone. Paulson announced the US Treasury would authorise up to US$700 billion-worth of asset purchases. As it turns out, the program ‘only’ spent US$431 billion.
In other words, over the next 10 months the US Federal Reserve will spend more than the entirety of TARP with its bond buying program. So let’s put an end to the idea that the Fed is somehow pulling back on supporting the financial markets.
Remember the name we gave the latest Fed bond-buying program? That’s right, we called it ‘QE Infinity’. We gave it that name because we have no doubt the Fed will keep buying assets and propping up the market. The Fed has made that clear in all its statements.
As have the other central banks such as the European Central Bank (ECB) whose president, Mario Draghi, said the ECB would do ‘whatever it takes‘ to support the markets.
This all goes to support our view that, despite plenty of bumps along the way, stocks will keep rising this year. Even if the Federal Reserve cuts its current program to zero, be in no doubt that another program will emerge if markets get withdrawal symptoms.
So, that’s our prediction for the year. As we mentioned at the top of this letter, it’s important to make predictions. By making a prediction for the year ahead you can judge where you believe the market is heading and how confident you are of your prediction.
We’re certain we’re right. That’s why we recommend buying stocks to potentially benefit from a rising market. But we’re also aware that there are still many problems facing world economies. If things pan out worse than we expect and central banks aren’t quick enough to prop up falling markets then you could see stock prices fall.
Cheers,
Kris+
Special Report: Three Predictions for 2014
