The ASX has continued its dismal run for the year, dropping 0.2% yesterday. Today doesn't look any better, the S&P/ASX 200 down 0.6% with soft Chinese data weighing on the market. Overnight, the S&P 500 was virtually flat, adding less than 0.1%, while the Dow Jones fell 0.3%.
Dan Morris, global investment strategist at TIAA-CREF Asset Management, summed it up best, telling Bloomberg…
"Earnings are all that matters, …we just need to wait for earnings to catch up and accelerate a bit and that may take a quarter or two".
In other words, the market is in a holding pattern, waiting for earnings season to kick off, starting next month. After that, it could be full steam ahead again for the ASX, especially if the experts at Macquarie are right.
ASX 5,900
According to the AFR, the investment bank has forecast the ASX 200 to be at a rather precise looking 5894 points at the end of 2014.
Let's just call is 5900, huh?
Give or take a few points, based on Macquarie's forecast, investors are potentially looking at another year of double-digit returns, with those juicy fully franked dividends on top.
The rich getting richer and expect to be even richer next year…
Here at The Motley Fool, we're certainly optimistic about the year ahead, and some of the world's wealthiest billionaires agree with us.
Eighty billionaires are attending the World Economic Forum in Switzerland, and several have told Bloomberg they expect to be richer when they return next year, with Africa's richest person, Aliko Dangote saying…
"The bull market will continue, we've actually turned the corner".
Irish billionaire and mobile phone tycoon Denis O'Brien, is also bullish on equities, saying…
"I'm comfortable that the equity markets will continue to be better over time with increasing value and dividends."
And don't we just love our dividends!
Mr O'Brien added…
"The stock market will be up due to better global earnings and consumers doing better. Consumers are recovering their appetite for goods".
If he is proven correct, our Aussie retailers will be cheering as cash registers sing again!
That includes our two department store owners David Jones (ASX: DJS) and Myer Holdings (ASX: MYR), both of whom are still paying fully franked dividend yields of over the magical 5% mark. Either one could be a sensible alternative to our big four banks.
Speaking of which….
Banks NOT overpriced say some fund managers
It seems my comments earlier this week about the big four banks being expensive might not have been to everyone's liking, as judged by this email we received in the Fool mailbag.
"You guys are making fools of yourselves as you keep bagging the banks. Smart investors are not taking your advice and are making a fortune. People don't take you seriously."
Just to be clear, it wasn't me who was saying "Australian banks are the most expensive in the world." That quote was from Nader Naeimi of AMP Capital Investors. What I did say was that buying the banks today was a bet I wasn't willing to make.
As far back as May 2013, UBS analysts were calling Commonwealth Bank (ASX: CBA) "the most expensive bank in the world by almost every measure." At the time, CBA shares were trading at just under $70, compared to over $75 currently.
We don't make predictions, but just call things as we see them.
That said, I fully admit we didn't see the 20 – 30% run-up in the big four bank stocks in 2013. Congratulations and well done to bank shareholders (including our own Bruce Jackson who holds interests in three of the big four banks).
There's more than one way to skin a cat…
Motley Fool Share Advisor, our subscription-only stock picking service, hasn't recommended a single big four banking stock, yet the average stock pick is up 34.6%, compared to the index of 18.3%.
Smart investors who are taking the advice of Motley Fool Share Advisor could be sitting on some rather impressive profits, especially if they jumped into the four ASX stocks on the scorecard which are up more than 100% over the past two years.
Anyway, enough bragging… and back to those big four banks. The challenge now is to look ahead to what the future holds for the banks.
While Australia's big four are currently expensive, their stock prices could still go higher yet, especially if they can generate higher earnings and dividends. On that point, I asked Motley Fool Advisor and banking expert Joe Magyer for his thoughts.
Joe knows a thing or two about banks, and picking stocks. Over in the States, hisMotley Fool Inside Value newsletter has beaten the Wilshire 5000 for the 6th consecutive year, making it the ONLY newsletter in America to do so, per Hulbert's Financial Digest.
Joe's been living in Sydney for the past year, head down researching ASX stocks. You'll be hearing a lot more from Joe in the coming weeks.
"The banks are painfully expensive… buyer beware"
Over to Joe…
"Growth for the 4 big banks will be hard to come by in 2014 — unemployment is rising, so are capital requirements, and the low-hanging competitive fruit has been plucked.
Meanwhile, the banks are painfully expensive, even if some fundies want to delude themselves into believing otherwise, and their outsized leverage is a soft underbelly that would be exposed if the Australian economy back-pedals.
I'm not suggesting yanking your cash out of the banks and retreating to the Blue Mountains to weather an economic storm, but the banks' big balance sheets and frothy valuations make these seemingly conservative businesses stealthily risky. Buyer beware."
Now, onto another topic that will have the big banks sitting up and paying attention.
Interest rate cuts are dead in the water… for now
Australian Bureau of Statistics data yesterday showed inflation has jumped to 2.7%. Some economists are now calling an interest rate rise in February or March, with Stephen 'TheKouk" Koukoulas tweeting,…
"RBA hike in Feb on table, more likely to act in March".
RBC Capital Markets strategist Michael Turner disagrees, saying…
"We are still saying [another rate cut will be in] Q2."
AMP's Shane Oliver is opting for no change, saying the CPI data…
"substantially reduces the chances of another rate cut", but adds "it wouldn't be enough to shock the Reserve bank to hike."
I tend to agree with UBS's Matthew Johnson, who sees the RBA as staying on hold this year.
With record low interest rates boosting levels of activity outside the mining sector, and the Aussie dollar trading down to Governor Glenn's target of US 85 cents, there appears no imminent reason for the RBA to either raise or lower rates.
Raising rates could stall the apparent recovery in the building and construction sector, something Mr Stevens and his merry men at the RBA will be very mindful of.
Low interest rates are here to stay, like them or not!
At the very least, sustained low interest rates of between two and three per cent look to be here to stay, for the long-term. Given that, and the fully franked dividends on offer from some of the ASX's top stocks, why would you choose to be invested anywhere else but the stock market?
