Backing a hunch beats a cloudy crystal ball

The sharemarket must always look ahead but it doesn't have perfect vision, writes David Potts.

The sharemarket must always look ahead but it doesn't have perfect vision, writes David Potts.

THERE'S a reason the sharemarket doesn't see things quite the same way as you.

Much as the experts pretend otherwise, it's not the hard evidence of facts that moves it, unless they suddenly and unexpectedly change, but a more ephemeral "how it feels".

Brokers like to say the economic fundamentals win out in the end but I'm convinced it's the other way around. The fundamentals catch up with the sentiment, which by then will have moved on. It's kind of time-shifting between the present (or rather, the very recent past, because that's what looms largest) and likely future profits.

That's why the sharemarket, which looks ahead, seems to be picking up steam just as the economy is running out of it.

This schism between what you see and what might happen has been likened to driving with the rear-vision mirror. Fine if it's a straight road but watch out if you're going up a mountain.

Mind you, economists have an even worse time of it because the figures they rely on are dated and can be downright wrong.

Whole recessions have been expunged by subsequent statistical revisions up to two years after the event - sorry, non-event. And so the sharemarket's sudden perkiness bears little relation to what you see around you, unless you live somewhere such as Port Hedland - and even that might not be much consolation.

The big bank and resources stocks, about three-quarters of the market, are dragging the chain but small stocks are on a roll - up 12 per cent so far this year. Something must be in the wind.

It has a lot to do with the drop in the dollar, or I should say the expectation it'll drop further, along with a strong run on Wall Street, which, within striking distance of its record, has run ahead of itself.

Could the improving-but-still-sluggish US economy really be only 10 per cent off its personal best?

Of course not - don't forget the time-shifting. But Wall Street expects it will be soon.

In fact, it's been saying so since October and I suspect it has run ahead of itself, making it temporarily vulnerable to wherever the next shock wave out of Europe might be - and there are plenty of countries to choose from, with the odds narrowing on Spain.

Likewise the bond market, an even better bellwether of where the US economy is going, has been marking up interest rates, though some have interpreted this as a prediction about inflation.

But if you believe it's saying that, then it's telling you inflation in the US will be just 2.2 per cent a year for the next 30 years. I don't think so.

By contrast, our market is counting on more Reserve Bank rate cuts, which would be a double bunger: boosting spending as well as pulling down the dollar.

The trouble is, it can't see the next one coming until May at the earliest.

That's odd logic when you think about it. If the market is convinced the economy will need more stimulus, you have to wonder why it's not expecting the Reserve to move at its next board meeting on Tuesday.

Guess it doesn't think the Reserve can see as clearly as it can. Or maybe it's convinced Treasurer Wayne Swan's let's-talk-tough-when-you-know-I-won't-be budget will somehow make a difference to the timing.

Anyway, until the next rate cut is done or at least the Reserve drops more specific hints about one, it seems the market is going to remain stubbornly gloomy about resources stocks.

It's apparently convinced that commodity prices will fall by more than the dollar.

But that doesn't mean it can see the future any better. After all, the US is picking up and demand from China, while not growing as fast as before, is still running high.

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