Doom and Gloom Creates Buying Opportunity in Stocks…
Did the recent stock price action surprise us?
No. Just the opposite in fact.
The recent stock price action confirms what we’ve said in recent weeks.
While the mainstream press and many analysts banged on about the search for yield driving stock prices, we said investors didn’t really want yield at all.
Or not just yield anyway. They wanted more than that. It just goes to show, you need to pay more attention to what investors do rather than what they say…
The recent fall is exactly why we suggested you should tread with caution before buying income stocks at the high.
It was good to be cautious. The Australian market has slumped 400 points in two weeks. That means we’re in ‘correction’ territory now.
So, what was it about the market action that stumped so many in the mainstream?
Simple. Most folks looked at investors rushing into dividend stocks and assumed investors wanted income. While that’s partly true, it doesn’t tell the whole story.
The fact that dividend stocks reached a peak and then fell in recent weeks tells you investors want more than dividends…they want growth too.
After all, paying a sky-high price for Commonwealth Bank [ASX: CBA] to get a dividend yield of 5% is still better than anything you’ll get in a savings account.
But the fact is it’s not just about yield. There are a bunch of other factors involved. One of them is risk. You can lose some or all of your capital in the stock market, whereas thanks to the government guarantee you can’t lose capital from a bank account (subject to government-imposed limits).
There’s another reason. Foreign investors piled into the Australian market while it looked as though the Aussie dollar would keep climbing. Remember all those forecasts about the Aussie dollar hitting USD$1.50?
Well, now that foreign investors realise the Aussie dollar can fall, they’re quickly taking measures to protect their money. Either they’re selling Australian stocks and repatriating the dollars back to their home currency, or they’re putting in place hedging strategies to protect their Australian dollar exposure.
Both have the effect of putting further downward pressure on the Australian dollar. Of course, if the Australian dollar reverses and heads back up, the unwinding of these hedging transactions would increase the upward pressure.
That’s what happens in a leveraged market. You get bigger swings.
But perhaps the biggest fib about the recent move was the story that investors had given up on growth…
And you can’t blame them. When you’re getting 40-50% capital growth plus 5-7% dividend yield, it’s easy to be greedy. But with income stocks trading at full valuation, there wasn’t room for further growth.
So it’s not surprising that stocks fell back from the peak, just as we expected (and feared) they would. The question now is whether stocks will fall further.
The benchmark S&P/ASX 200 is already about 100 points lower than we had bargained for. Our bet was that stocks would trade between 4,900 and 5,200 points for the rest of the year.
For now we’ll stick with that view. Odds are the market has experienced what Murray Dawes calls a ‘false break’. That’s where an index or stock goes through a previous support or resistance point, but rather than continuing to fall or rise it reverses back with the range.
We suggested you start to ‘average in’ to stocks when the index got to around 5,000 points. That means buying one-third or one-half of your usual transaction size.
If you followed that advice, we’d suggest buying another third or half of the position today. While there’s still a risk stocks could fall further, investors with a sensible stock exposure should be able to invest through this volatile period without any worries.
Furthermore, the recent fall shows perfectly why we still recommend a relatively conservative approach to the stock market.
The market can turn on a sixpence quickly. If you have too much of your wealth in stocks, these big moves can cause you to panic and sell when you should be looking to buy stocks.
In short, this recent short-term fall has given you a great opportunity to top up your stock portfolio while over-exposed investors sell.
Although the growth and dividend picture may not be as great as it was 12 months ago, even some of the big blue-chips could give you 20-30% growth plus 6% dividends over the next year.
Again, we know it’s not a popular view to take in this market, but stocks look pretty good value right now. It’s definitely a time to buy rather than sell.
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.