1) US markets closed out January with solid gains as, according to Bloomberg, "investors cheered signs of labour costs easing and inflation cooling."
"Data on Tuesday showed US housing prices continued to cool, while another report highlighted consumer confidence unexpectedly falling. Hanging over everything is Wednesday's Fed decision, with the central bank widely expected to raise rates by a quarter percentage point."
Marketwatch reported the Nasdaq Composite Index (NASDAQ: .IXIC) cemented its best January performance since it notched a 12.2% gain in 2001, while the S&P 500 Index (SP: .INX) booked its best start to a year since 2019, according to Dow Jones Market Data.
2) Here in Australia, the S&P/ASX 200 Index (ASX: XJO) ended January 6.2% higher, with the AFR reporting the one month rally in the stock market "entirely recouped last year's losses."
It's a salient reminder that if you miss the best few days or months – in a futile attempt to get in and out of the market with perfect timing – your returns are likely to lag that of the market.
Perhaps not surprisingly, two of the best performing ASX 200 stocks in January were lithium stocks, with the Sayona Mining Ltd (ASX: SYA) share price gaining 37% and the Pilbara Minerals Ltd (ASX: PLS) share price jumping 27% higher.
To my detriment, I've let the whole lithium stock boom pass me by, just as I steered clear of the whole cryptocurrency and NFT craze. Fear of missing out (FOMO) is not an investing strategy. I don't have the skills or frankly the interest in working out whether a lithium stock – and the lithium sector – will be a good investment or not.
3) In the AFR's Chanticleer column titled "Why bad news is good news for lithium stocks", author James Thomson quotes Macquarie as saying…
"Supply response will lag demand, resulting in a market deficit and elevated lithium prices. In addition, we believe the capex upgrades could also shift the cost curve upwards, translating to higher lithium prices in the long term."
Rising electric vehicle (EV) production is fuelling demand for lithium, and this is translating into the surging prices of lithium stocks, something at Thomson says "speaks in part to a return to the global burst of speculative bullishness, and in part to new data suggesting lithium demand over the next decade could be even stronger than expected."
A lot can change in a decade. History says there will be some big winners in the lithium space, and some will flame out. Good luck sorting the wheat from the chaff.
4) As ever, it takes two or more participants to make a market.
The bulls – buoyed by the great January – will point to inflation as having peaked, interest rates close to a peak, and corporate profits holding up. A soft economic landing could – somewhat amazingly given all we've been through since COVID first struck in early 2020 – see the stock market hit new highs this year.
The bears will point to inflation being a tough nut to crack, meaning interest rates will rise higher than current expectations, which in turn will see unemployment rise causing an inevitable recession. In effect, a hard landing.
Good luck picking the winner. As an eternal optimist, I'm hoping the global economy will keep muddling through as it resets from the massive external shocks of COVID, Ukraine war, inflation and one of the sharpest pace of interest rate hikes on record. If markets can average a gain of 7 to 10% per annum over the next five years, I'll be content.
On the other hand, noted bear Jeremy Grantham continues to warn investors of a potential 50% decline in the stock market this year as he believes valuations are still too high, according to a report on Markets Insider.
As an asset manager, billionaire Grantham can't sit in cash waiting for the crash. Nor can he short the whole market, for the timing of any potential stock market crash is unknown.
As for what Grantham is backing, Markets Insider quotes from his 2023 outlook letter…
"Despite the generally unattractive nature of the U.S. equity market and the extremely tricky global economy, there are still a surprising number of reasonable investment opportunities even if they are not sensational… emerging markets are reasonably priced and the value sector of emerging is cheap."
Australia may not be an emerging market, but we aren't the US equity market. Writing on Livewire Markets, AMP Chief Economist Shane Oliver gives seven reasons why Australian shares are likely to outperform global shares over the medium term. Included are a new super cycle in commodities, population growth, higher dividends and a thawing in the China relationship.
Back to Grantham, who also says…
"For those with a longer horizon than average, say 5 years and above, I believe stocks related to addressing the problems of climate change and the increasing pressure on many raw materials have a substantial advantage over the rest of the economy as the world's governments and corporations begin to accept the urgency of these problems."
Super cycle in commodities.
Climate change.
China.
Lithium stocks, anyone?
