Just when you thought it was safe to pile into stocks…
You can kiss goodbye yesterday's strong recovery in the ASX. The overnight action on Wall Street, where the Dow slumped 272 points, sets the scene for today, one of those investing days where there is simply no place to hide.
You're prepared for this though, aren't you?
Prepare NOT to sell, just because the market is falling.
Prepare to BUY stocks as the market falls, because stocks are cheaper and dividend yields are higher.
On the latter point, if you are looking to put money to work now, the timing could be perfect.
Back to the markets…
Doing the damage overnight were my old friends at the International Monetary Fund (IMF). They cut their global growth forecast and warned of "frothy" equities amid signs of slowing growth in Europe.
When it comes to the IMF, there are three things you can be sure of…
1) Their pessimism and short-term focus.
2) That they tell you the obvious.
3) That they WILL be wrong.
On the last point, I remember back in January 2012, when IMF chief, Christine Lagarde said the world was facing "a 1930s moment, in which inaction, insularity and rigid ideology combine to cause a collapse in global demand".
"This is a defining moment," she was quoted in The Age. "It is not about saving any one country or region. It is about saving the world from a downward economic spiral."
Yikes. With warnings like that, the temptation was to sell all your stocks, liquidate all your bank accounts and stick all your money in that so-called safe haven of gold.
Since then, the S&P/ASX 200 Index is UP over 20%. The S&P 500 is UP close to 50%. The gold price is DOWN 30%, and Ms Lagarde has since been placed under formal investigation over a 2008 payment scandal.
Who's having the 1930s moment now then?
The moral of the story is clear…
Given Ms Lagarde took over the top job at the IMF from the disgraced Dominique Strauss-Kahn, if you ever get approached for role, just say no.
From an investing perspective, take anything the IMF say with a large pinch of salt. Instead, focus on the big picture, focus on the long-term, thank your lucky stars for the dividend paying stocks already in your portfolio, and carry on.
Still, when markets are jittery, anything is possible. As one JP Morgan pundit on Bloomberg put it…
"The dollar surge, Hong Kong protests, Ebola scare and weakening oil prices, somewhere circled together in those things is the root of this recent pullback."
Looking more locally, you could add in the falling iron ore price, rising unemployment and high house prices… and it all adds up to nervousness, and just a whiff of fear.
Speaking of fear, overnight the Volatility Index (VIX) jumped 13% to 17.43, its highest level since March. The VIX is commonly known as the "fear Index," the higher the number, the more fearful the market.
Putting the current level of the VIX in perspective, even after this jump, only now is it trading a close to its long-term average.
Nothing to worry about here, then… no pain, no gain.
Speaking of pain, the IMF took aim at Australia too, saying it expects the Lucky Country to have the worst jobless rate in the Asia-Pacific region bar the Philippines over the next two years.
Joyful lot, aren't they?
True to form, the IMF are telling us something we already know, predicting an unemployment rate of 6.2% in 2014 and 6.1% for 2015. Economists expect Thursday's jobs figure for September to show an unemployment rate of 6.2%.
Add it all up, and it puts yet another nail in the coffin of term deposit rates. It would be a brave Reserve Bank of Australia (RBA) who raised interest rates in the face of such a high unemployment rate — house price bubble or not.
Prominent economist Stephen Koukoulas, aka The Kouk, is calling for the RBA to cut interest rates, as per his tweet yesterday…
"RBA clearly dovish on interest rates. Still unclear why it isn't cutting as unemployment rises and inflation and terms of trade are dropping."
All this came after the RBA left interest rates on hold at 2.5% for the 14th month in a row. Things are getting a little monotonous for the boffins at Martin Place.
AMP's Shane Oliver tweeted that his view remains interest rates will be on hold well into next year, and the $A will fall to around $US0.80 over the year ahead.
Speaking of Shane Oliver, his latest insight says that although we may see a stock market correction, the bull market will likely remain intact thanks to a lack of overvaluation, the benign economic cycle, easy monetary conditions and a lack of investor euphoria.
He goes on to say "we are still a long way from the sort of investor exuberance seen at major share market tops."
The chart below is one of the most insightful and revealing I've seen in quite some time.
Source: AMP Capital
As Mr Oliver says…
"In Australia, the amount of cash sitting in the superannuation system is still double average levels seen prior to the GFC and Australians continue to prefer bank deposits and paying down debt to shares and superannuation. There is still a lot of money that can come into equity markets as confidence improves.
So absent a left field shock the most likely outcome is that, while shares could see more downside in the next month, this is likely to be limited with the bull market to continue."
Bull market? It doesn't feel like one now, huh?
But zoom back a little, and yes, even here in Australia, this IS a bull market. As a reminder, the S&P/ASX 200 Index piled on 15% in 2013, with bank stocks like Commonwealth Bank of Australia (ASX: CBA) faring even better, up 25% in the same twelve month period.
So, brave, Foolish Investors, what are you going to do now?
Gold? I think not.
Term deposits? Good luck with them.
Speaking of term deposits, are you content to earn a paltry 2% or 3% per annum, losing to inflation?
To put that return into perspective, Mozo spokeswoman Kirsty Lamont recently said…
"… you need to be earning at least 4.44% if you're an average income earner to get ahead after inflation and tax."
It's sobering.
Your money is safe in a term deposit, but you are effectively going backwards. That's a high price to pay for safety… especially when dividend paying stocks are trading on yields of 5% or more, many fully franked.
My guess is the fear of a stock market correction, or even crash, plus the still recent memory of the GFC is keeping Australian investors on the sidelines.
Not so those Americans, who apart from the recent jitters, have long been piling into stocks, especially dividend paying stocks, including Coca-Cola, one of Warren Buffett's largest holdings.
Overnight, the soft drink giant was the only one of the Dow's 30 components to end the day higher, now trading within a dollar of its all time high.
According to Google Finance, Coca Cola stock trades on a dividend yield of 2.78% — not bad in comparison to zero per cent US interest rates, but a million miles from some of the yields on offer on ASX stocks.
On a somewhat related point, the ASX's own Coca Cola Amatil (ASX: CCL) is trading at close to a 52-week low, and on a forecast dividend yield of around 5.3%, 75% franked. Coca Cola Amatil has some problems of its own, and recently cut its dividend, but at these levels, it certainly looks tempting.
Another tempting, high yielding stock that's flying under the radar is Mighty River Power (ASX:MYT), one of New Zealand's largest electricity producers.
Quoted on the ASX, the stock trades on a trailing dividend yield of over 5%. As Motley Fool Pro Analyst Matt Joass says , Mighty River Power's low-cost generation assets should provide a steady stream of growing dividends for years to come.
I'm not an owner yet, but you can certainly call me tempted. Whichever way you look at it, that 5%+ dividend yield beats the pants off term deposits.
