The Trump bull market rally took the Dow Jones Index to all-time highs overnight and a leading US academic who has been right since 2009 says the Yanks could take their market 5% higher before Christmas! And he pointed to the Fed boss Jerome Powell and his testimony to the US Banking Senate Committee on Thursday as the prime reason.

The Federal Reserve Chair said that his central bank will “act as appropriate to sustain the expansion.” And he added: “The bottom line is the economy is in a very good place, and we want to use our tools to keep it there.”

And he won’t be alone in trying to keep economic growth up, with the IMF calling for fresh stimulus from the European Central Bank, citing rising risks from trade tensions, the Brexit and Italy.

But this more expected cut in US rates on July 31 isn’t just about perceived possible organic economic growth slowdowns, with the Fed’s interest rate committee clearly worried about the effects of the trade war.

“Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy,” said Mr Powell, which is code for trade war worries and even the global threat of a bad Brexit deal.

The link between the Powell play on rates and stocks was shown when the S&P500 briefly crossed the 3000-point mark for the first time after the Fed Chair signalled that a rate cut is likely later this month and Amazon rose 1.5%, Microsoft 1% and Apple 1%, showing how the big tech players need help because of the trade war threat.

I know it’s a cliché but it’s steeped in truth and Michael Katz, partner at Seven Points Capital, summed it up: “You can’t fight the Fed here – we have a strong bull market and we have a strong uptrend.

As long as we’re heading higher, we’ve got to keep buying dips and not fight the trend.” (CNBC)

Wharton School professor, Jeremy Siegel, is a big believer in this bull market. Siegal thinks another 5% onto US stocks isn’t out of the question. And he thinks a 0.5% cut on July 31 can’t be ruled out.

According to the CME Group’s FedWatch tool, market expectations for lower rates currently sit at 100%.  Traders are also pricing in a 20% chance of the Fed cutting by 50 basis points. “I think fair market value does give us another 5% or 6% this year but we may go up 10% or 12% before we sell off,” he told CNBC.

And while this cutting seems over the top, you have to recall that the Fed did hit the US with four 0.25% rate rises last year, leaving the Fed’s fund overnight bank lending rate at 2.25% to 2.5%.

This cutting requirement wouldn’t be needed if there wasn’t a trade war going on right now.

To the local story and the S&P/ASX 200 Index gave up 54.8 points (or 0.8%) over the week to end at 6696.5, which seems unusual, given the big week for US stocks. Sure, the bad start was linked to the good US jobs number that suggested that the Fed mightn’t cut rates but by Thursday Jerome Powell sorted that out.

And believe it or not, the pros in the money market can see three rate cuts coming over the next six months!

Bond proxy stocks like REITs and Sydney Airport fell this week, while Afterpay copped a downgrade from Goldman Sachs and was taken off its high conviction buy list. Perennial disappointer, G8 Education, dropped 10.7% after copping a couple of downgrades. However, the love returned to A2 Milk after a UBS upgrade. “A2Milk has a unique brand with a material long-term growth opportunity via penetrating the Chinese market and expanding into the US,” analyst Ben Gilbert said. Its shares closed 10.6% higher at $15.85. (SMH)

UBS thinks the company could take 10% of China’s infant formula market by 2025! That’s a huge call.

On the bigger economic picture, CommSec’s Craig James joined me in the optimists’ club by pointing out that “on the wealth side of the equation, Aussie shares (S&P/ASX200 Index) are up by nearly 6% over the past year – not far off 11½-year highs. And property prices in Sydney and Melbourne are showing tentative signs of stabilisation after falling for around two years.”

Even the experts can be confounded by the machinations of economies. But I’ve learnt over the years that economies can be slow to react to good and bad news, so I’m sticking to my view that a second-half rebound is probable. I made this point in Switzer Daily on Friday: “I guess the stock market that’s up 21% year-to-date is agreeing with me!”

Remember, we always say the market shows us what investors expect six or so months in advance of reality. It can be wrong but what I buy today says something about the market’s future views on company profits, share prices and so on.

Finally, US reporting season really hots up next week and FactSet analysts expect the S&P500 earnings to fall by more than 2% in the second quarter. The well-known reporters will be Charles Schwab, BlackRock, Domino’s Pizza, Goldman Sachs, Johnson & Johnson, JPMorgan Chase, Morgan Stanley, Netflix, United Airlines, UnitedHealth, Wells Fargo, Alcoa, Bank of America, IBM, AMEX, Microsoft, PayPal, Philip Morris, eBay, Honeywell, Schlumberger and State Street.

The outlook statements from these companies could make or break this current leg up for stocks but it would only be temporary. I think Siegel’s call has legs, especially is a trade war settlement eventuates.

What I liked

• The share of first-home buyers in the home lending market hit a near 7-year high of 28.6%. (Also this was May when the Bill Shorten effect on property was still operational, with his negative gearing and capital gains tax promised changes.)
•  The monthly reading of labour costs grew at a 1.5% quarterly rate in June – the strongest growth rate in eight years. And while this isn’t great news for business, it is good for wage earners and consumers.
• The Westpac consumer confidence survey revealed that the ‘time to buy a dwelling’ index rose by 5.4% to 123.2 points in July – the highest level in five years.
• The ANZ consumer survey told us the measure of family finances compared with a year ago (‘current finances’) rose by 3.7% to +13 points – the highest level in five months.
• The monthly reading of labour costs out of the NAB business survey grew at a 1.5% quarterly rate in June – the strongest growth rate in eight years. This is an overdue good sign for wage rises.
• The NAB survey also said that business conditions, which tells you what business is saying about what it’s like in the shop, the office, the factory, etc., rose from 1.2 to 3.4. Let’s hope this is an omen for the future.
• The ANZ job advertisements rose by 4.6% in June – the biggest monthly gain in 18 months.
• The national average retail unleaded petrol price has fallen by 3.4% to 140.5 cents a litre over the year to July 7.
• The annual number of permanent and long-term overseas arrivals rose to a fresh record-high of 848,570 people, up by 5.7% over the year to May.
• US core consumer prices (CPI inflation) rose by 0.3% (consensus: +0.2%) to be 2.1% (consensus: +2%) higher over the year to June. Remember, we want inflation nowadays!

What I didn’t like

• The NAB business confidence index fell from 10-month highs of +7.3 points in May to +2.2 points in June. The long-term average is +5.9 points.
• The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.1% to 96.5 points in July – the lowest level since August 2017. Consumer sentiment is below the longer-term average of 101.5 points.  A reading below 100 points denotes pessimism.
• The value of owner-occupier home loans fell by 2.7% in May, with investment loans down 1.7%, in seasonally-adjusted terms. But this was still May when Bill Shorten’s policies were anti-house price and property investors.
• The value of loans (to households) for home alterations and additions fell by 1.2% to a record-low $270 million in May but this again was the election month.
• The NFIB Small Business Optimism Index in the US fell by 1.7 points to 103.3 points (consensus: 103.1 points) in June.
• Shares in Deutsche Bank fell by 5.4% as investors questioned the bank’s restructuring targets as it began cutting 18,000 jobs globally in a €7.4 billion “reinvention”.

Trump’s trade truce, please!

Trade concerns resurfaced after broker RBC Capital Markets downgraded 3M shares by 2.1% to “sector perform”, citing macroeconomic pressures from China in the auto and electronics sectors.

This is why a Trump trade truce would be good.

A limited number of complimentary tickets to the Switzer Listed Investment Conference are still available for our valued subscribers, so click on the event you would like to attend below to get your tickets:

• Sydney, Friday 16th August
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• Brisbane, Wednesday 21st August

The week in review:

• Iron ore prices have recently taken BHP’s share price up to unexpectedly high levels but a Chinese inquiry could bring it down again. So is it time to sell BHP?
• Paul Rickard wrote this week that CEO Brad Banducci is getting rid of Woolworths’ problem child – its exposure to pokies and alcohol – and the market has reacted predictably to news of the demerger and taken its share price higher. Is this demerger a reason to hang on? Or should Woolies be on your sell list?
• Cash is no longer king but a burden according to Charlie Aitken. With equities appearing more attractive relative to other asset classes, there’s a growing chance this equity bull market extends, as money rotates into equities from cash and fixed interest.
• The emergence of fixed-interest ETFs on the ASX is an important innovation for retail investors. Like all ETFs, the fixed-interest variety are quoted on the ASX, bought and sold like a share, and have lower fees than active funds. In the Report this week, Tony Featherstone put forward 5 fixed-interest ETFs to consider.
• Aussie companies selling consumer goods to China experienced “glory days”, making full use of our reputation of producing clean, high-quality product. But in the last 12 months, things have changed. Here’s the tale of 4 Aussie vitamins and baby-food stocks that could be falling from grace by James Dunn.
• Our Hot Stock from CMC Markets’ Chief Market Strategist Michael McCarthy was Ooh! Media (OML).
• FNArena registered 5 upgrades and 10 downgrades in the first Buy, Hold, Sell – What the Brokers Say this week, and there were 13 downgrades and 8 upgrades in the second edition, including downgrades for 8 materials stocks by Macquarie and upgrades for 4 retail stocks by Citi.
• In Questions of the Week, Paul Rickard answered readers queries about whether Costa Group (CGC) is a buy, if you can do a one-off transfer of shares to your super fund, and investing outside super.

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday July 16 – Weekly consumer confidence (July 14)
Tuesday July 16 – Reserve Bank Board minutes
Wednesday July 17 – Leading Index (June)
Thursday July 18 – Employment/unemployment (June)
Thursday July 18 – NAB business survey (June Quarter)

Overseas
Monday July 15 – China Economic growth (June quarter, annual)
Monday July 15 – China Investment/production/sales (June, annual)
Monday July 15 – China House Price Index (June, annual)
Monday July 15 – US Empire State Manufacturing Index (July)
Tuesday July 16 – US Retail sales (June)
Tuesday July 16 – US Import/export prices (June)
Tuesday July 16 – US Industrial production (June)
Tuesday July 16 – US NAHB Housing Market Index (July)
Wednesday July 17 – US Housing starts (June)
Wednesday July 17 – US Federal Reserve Beige Book
Thursday July 18 – US Philadelphia Fed Manufacturing Index (July)
Thursday July 18 – US Leading Index (June)
Friday July 19 – US Consumer confidence (July)

Food for thought: 

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros

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.

Chart of the week:

The Dow Jones Industrial Average cracked 27,000 for the first time on Thursday, just over a year and a half since the index broke above 26,000, as this chart published by CNBC shows:

Top 5 most clicked:

• Is it time to sell the big Australian? – Peter Switzer
• Demerger relief for Woolies but is it still a sell? – Paul Rickard
• Cash is not king – Charlie Aitken
• Buy, Hold, Sell – What the Brokers Say – Rudi Filapek-Vandyck
• Glory days, well, they’ll pass you by – James Dunn

Recent Switzer Reports:

Monday 08 July: BHP and Woolies

Thursday 11 July: Where will all the cash go?

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.