Can Trump's tax trick turnaround testing trade sideways?

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The September quarter was an underwhelming affair but one good thing is that it takes us closer to the best time in the year for stocks, which runs between November to April, where returns have averaged being 10 times better!

Here’s a chart I’ve shown you before from 37 markets and it’s good news ahead, provided we get through October, which has housed a few crashes in its time, such as the 1987 one, the GFC and a little thing called the Great Depression, with its Black Monday for Wall Street!

Fortunately, the Trump tax plan should help keep it positive, unless the Congress says no. We’ve been elevated to these levels by the so-called Trump bump but if he gets another failure with Congress, his whole economic reform offering could be dismissed and that could be the black swan event we don’t want to have.

Thankfully, the two more important indexes for US stocks – the S&P 500 and the Nasdaq – were up again and into record territory. And to contrast us with the US, this has been the best September quarter on record for the stock market since 2013.

And I liked this from CNBC: “The SPX has broken out of its consolidation phase, generating a bullish “pop” in the daily stockastics,” BTIG Chief Technical Strategist Katie Stockton said in a Friday morning note.

“This supports near-term positive follow-through, and suggests it will take at least a couple of weeks before ‘overly bullish’ sentiment gives way to a pullback.

Importantly, the Russell 2000 Index has confirmed a breakout above final resistance at its July high, reflecting the expanding breadth behind the rally,” she said.

OK, you get it, this tax plan hasn’t hurt our stocks’ outlook and could be the thing to get us out of this sideways trade.

Let’s go local now and our third quarter ended with the benchmark S&P/ASX 200 index finishing up 11 points (or 0.2%). So for the month, we saw a 0.6% fall and a 0.7% loss for the quarter.

We’re going nowhere slow but at least (as I’ve been pointing out) there has been no appetite for big sell offs and our encouragement of our subscribers to look to overseas for capital growth and at home for income has worked out nicely.

It is school holidays so action has been quieter but I’m sure the big players de-holiday themselves if the market beckons opportunity or substantial threat. This is an easy local market to ‘go fishing’ on.

Of course, the index hasn’t been helped by CBA and Telstra, which have had shockers. The big bank was down 9.1%, while the telco sector gave a new name to ‘shocker’, losing 18.6%!

Telstra and its life with and after the NBN, alongside a flagged dividend cut, hasn’t been well-received by stock players and for good reason.

It’s also been harder for bond-proxy stocks as bond yields rose to compete with them. Since the end of June, a great stock such as Transurban, now at $11.88 has dropped nearly a dollar.

One big dislike and like out of the quarter was the 81 US cent level reached, which partly explains the weak quarter. I did welcome the 78.4 US cents we saw on Friday – long may it slide until about 70 US cents, which would be great for the indexes that track stocks.

OK, let’s look for some good news for the sector and the Fairfax press got it right, pointing out that: “The mining and energy sectors put in solid performances over the September quarter with BHP up 10.7 per cent, Rio Tinto up 5.2 per cent and Santos jumping 33 per cent. It wasn’t all plain sailing however, with Fortescue Metals down 1.5 per cent and Woodside down 2.6 per cent in the three months.”

That said, Fortescue became one of the best dividend payers in the country and that was a surprise even to me!

While on iron ore (and for those who don’t track these sorts of things), the Dalian Commodity Exchange, the most-traded iron ore contract in the world, saw losses just over 20% for the month. However, over the quarter, it was down 3.2%, while over the year the rise remains solidly up.

The best news out of the quarter was economic, with the strong local job numbers starting to be supported by other positive signs for the economy, such as better business investment plans, record construction and talk that the upcoming infrastructure boom might be one and a half times bigger than the recent 15-year mining boom.

What I liked

China’s grow up or get out warning to Kim Jong-un, with bans placed on North Korean businesses because of his ‘rocket man’ antics.
Private sector credit rose by 0.5% in August after a similar rise in July. Annual credit growth rose from 5.4% to 5.5%. Business credit rose 4.5% over the year – a 7-month high.
Total household wealth (net worth) stood at a record $9,773.1 billion at the end of June, up $151.3 billion (or 1.6%) over the quarter. In per capita terms. CommSec estimates that wealth rose to a record $397,267 in the June quarter, up $4,730 over the quarter and up around $29,100 over the year.
A record 22.4% of all household assets are held in superannuation.
In real terms, household financial liabilities (basically debts) fell by $25.6 billion in the June quarter – the biggest quarterly fall in five years.
Job vacancies rose by 6% to a record 203,700 in the three months to August. Job vacancies are up 15.4% on a year ago.
Australia’s population expanded by 389,072 people over the year to March 2017 to 24,511,773 people. Overall, Australia’s annual population growth rate rose from 1.553% to 1.613% – the fastest population growth in three years.
The budget deficit for 2016/17 was $33.15 billion, or 1.9% of GDP. The budget deficit was a $4.4 billion improvement on the $37.6 billion deficit forecast just four months ago.
The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.6% to 114.1, after rising 4.6% to 7-week highs in the previous week. However, the confidence rating remains above short and long-term averages.
Trump’s tax plan with its proposal that the corporate tax rate will fall from 35% to 20%. And there would be just three tax rates for individuals of 12%, 25% and 35% with the first $12,000 of income to be tax free. The estate tax (death tax) is to be abolished.
US durable goods orders rose by 1.7% in August (forecast +1%)
US financial stocks rose on rising hopes for a rate hike in December and that will happen here for bank stocks when rate rises seem close, sometime in 2018.
In the US, final figures for the June quarter showed the economy growing at a 3.1% annual pace (forecast 3.0%)

What I didn’t like

Ruling parties in both New Zealand and Germany were unable to secure victories in their own right over the weekend. Coalition talks are underway in both countries but election results are starting to suggest that we should be thinking: “Voters? They’re the worst!” Or is it the politicians’ fault? Joseph de Maistre told us “Every country has the government it deserves!” He also pointed out that: “In a democracy, people get the leaders they deserve!”
Local petrol prices rose 0.4 cents a litre to a near 5-month high of 116.4 cents over the past week.

A worrying dislike

Trump’s tax plan has an equity issue, with the top 1% getting an 8.5% boost to after tax incomes. All other income groups get gains ranging from 0.5% for the lowest income earners to the 95th-99^th income earning group – the one just under the top 1% – which would pocket a 2.3% rise. However, Federal revenues would go up by $470 billion over 10 years, the Tax Policy Center in the US calculated.

Remember, the tax plan’s unveiling is one positive but the real boost to stocks will come when the indications are clear that Congress will green light the plan.

That’s the big watch for the December quarter, which is the nicest of all for stock players, provided, as I’ve said, you forget about a few scary market crashes in the month of October!

That said, I can’t see a black swan showing up, though that is their special quality – they’re not easily seen. I have to say I always get a little nervous whenever I see one of those ‘so and so’ birds when I stroll beside Albert Park Lake in Melbourne!

The week in review

I explain why I believe in this unusual bull market and also look at the economic story, what the experts are saying on rates, and what it all means for our stock market!
With North Korea in the headlines, James Dunn reveals five defence stocks worth keeping an eye on.
In the first Buy, Sell, Hold – what the brokers say, CBA was in the good books while Evolution Mining saw a downgrade.
And in the second Buy, Sell, Hold, Sandfire edged its way into the good books, while commodities firms such as Regis Resources copped a downgrade.
Among this week’s hot stocks are an investment house, a beverages business, a packaging company and a supermarket operator are among the likes and dislikes in this week’s Super Stock Selectors.
Charlie Aitken talks about the digitisation of the banking sector and asks, can banks become tech stocks?
Tony Featherstone uncovers nine retail stocks worth keeping an eye on.
In this week’s Professional’s Pick, Bill Laister of Contango Asset Management explains why he believes Service Stream (SSM) is well-placed for the year ahead.
In Questions of the Week, Paul Rickard answers queries about NGE Capital and PM Capital Global Opportunities Fund.

Top stocks – how they fared

What moved the market?

US President Donald Trump announced his new business tax plan, which would reduce corporate tax from 35% to 25%, with full deductions for capital spending and a tax concession for offshore funds repatriated.
The Commonwealth Bank, followed by the majors, cancelled the unpopular $2 ATM withdrawal fees.
News that job vacancies had jumped to around 6% in the private sector and 5% in the public sector year-on-year saw a dip in the Aussie dollar.
Gold reached a monthly low as the threat from North Korea appeared to lessen.
China ordered North Korean businesses operating in China to be shut down within 120 days, following UN sanctions.
Infant formula company a2 Milk has been given the green flag to sell its products in China, the first Australian brand to be registered after Beijing announced a crackdown last year.

Calls of the week

I made a call that our Aussie bull market is set to continue!
RBC analysts predicted that if Donald Trump’s tax cut plan was passed, it could increase US GDP growth by at least 0.5% per year.
Westpac economist Bill Evans predicted rates will stay on hold until 2020.
Tony Featherstone throws his weight behind Motorcycle Holdings, the latest addition to his list of favoured stocks.

The week ahead

Australia

Monday October 2 – CoreLogic Home Value index (Sept)
Tuesday October 3 – Manufacturing gauge (September)
Tuesday October 3 – Reserve Bank Board meeting
Tuesday October 3 – Building approvals (August)
Tuesday October 4 – Job advertisements (September)
Thursday October 5 – New vehicle sales (September)
Thursday October 5 – International trade (August)
Thursday October 5 – Retail trade (August)

Overseas

Monday October 2 – US ISM manufacturing (September)
Monday October 2 – US Construction spending (August)
Tuesday October 3 – US New vehicle sales (September)
Wednesday October 4 – US ISM services (September)
Wednesday October 4 – US ADP employment (September)
Thursday October 5 – US International trade (August)
Thursday October 5 – US Factory orders (September)
Thursday October 5 – US Challenger job layoffs (September)
Friday October 6 – US Non-farm payrolls (September)
Friday October 6 – US Consumer credit (August)

Food for thought

Life is 10% what happens to you and 90% how you react to it. Charles R. Swindoll

Last week’s TV roundup

There seems to be no slowing the US S&P 500 on its record breaking run. Lance Lai from Accountancy Invest returns to Super TV to discuss the world markets and reflect on last month’s predictions (broadcast Thursday 28 September, 2017).
To discuss the ATO’s new reporting requirements for SMSFs, BGL’s Ron Lesh joins Super TV (broadcast on Wednesday 27 September, 2017).
With the North Korea problem not going away anytime soon, James Dunn went looking for stocks that would benefit if a real war broke out. He joins Super TV to reveal five of them (broadcast Wednesday 27th September, 2017).
Why are economists so split on interest rates? Anne Anderson from UBS joins Switzer TV to discuss when she thinks rates will go up (broadcast Tuesday 26th September, 2017).
Jo Masters of ANZ joins Super TV to discuss the bank’s recent forecast on the Aussie economy (broadcast Monday 25th September, 2017).

Stocks shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

This week, one of the biggest movers was Rio Tinto, with its short position increasing by 1.64 percentage points to 9.53.

Source: ASIC

Charts of the week

The ANZ/Roy Morgan consumer confidence rating dropped by 0.6% to 114.1 last week, but this is still above the average of 113.2 since 2014 (as the chart shows), according to CommSec’s Craig James.

Recent Switzer Super Reports

Thursday 28 September – Banks and retailers
Monday 25 September – Unusal Bull Market

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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