Switzer on Saturday

Coronavirus fears are winning & stocks are losing, but for how long?

Founder and Publisher of the Switzer Report
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As I tipped in yesterday’s webinar, the US stock market and therefore our market has a few more legs down before the optimists/buyers outweigh the pessimists/sellers. That said, with three hours before the closing bell at the New York Stock Exchange, the earlier 894 point loss on the Dow had trimmed back to 505 points.

If the final close is bigger than 894, then we should expect another rough day for our stocks on Monday.

The big news overnight included:

  • The 10-year Treasury bond yield went below 0.7% and that’s a first!
  • Supply chain fears are powering recession concerns.
  • The OECD lowered its forecast for global economic growth from 2.9% to 2.4%.
  • But against these negatives, the good old Trump-USA delivered, wait for it, 273,000 jobs in February, when economists thought the number would be closer to 175,000!
  • Meanwhile, unemployment dropped to the best reading in half-a-century of 3.5%.

This good labour market story, which also says a lot about the strength of the US economy going into this Coronavirus-threatening period, has been added to three other reasons to help optimists maintain the faith that a rebound will eventually kick in.

First, China is starting to go back to work, which has to be a tick for fixing the global supply chain concern. Second, there is an expectation that global stimulus will eventually lean against the understandable negatives for economies and stock prices. And third, Chinese stock markets are rallying on the back of the belief that the country is getting on top of its challenges.

CNBC has captured the Coronavirus

Here’s nine days for the Dow and seven of them tell the story and until the green boxes start beating the red boxes, we will be in a downtrend. And what will turn it?

That’s simple – believable signs that Europe and the USA are winning the battle against the virus. The spread of the virus in the USA is capturing Wall Street’s attention now.

Reported infections worldwide are now over 100,000 and the deaths are around 3,380.

CNBC says the US has seen 12 people die but that will grow and the number of infections in New York was 33. That’s a low number but it’s still early days.

Donald Trump is putting pressure on to find a cure for the disease and an $8.3 billion spending bill has been signed to add to the 50 basis points rate cut from the Fed earlier in the week. The Yanks don’t muck around when the word “emergency” is driving sentiment.

Just as we’re seeing in China, when the virus-beating news starts to surface, stock markets will turnaround but it’s still early days for the US and Europe, with its open borders and its huge tourism business, what happens there remains a big stock market issue.

The chart below has been inserted for doubting optimists.

The Shanghai Composite over Five Days

Don’t forget on Wednesday after Joe Biden had a ripper performance at the Democrat’s Super Tuesday vote, the Dow had it second best point-gain ever! At the close, the Dow Jones index was higher by a record 1,294 points (or 5.1%), ending at session highs.

However, “US share markets fell sharply on Thursday as investors fretted about the swift spread of the deadly coronavirus in the United States. California declared a state of emergency and the number of virus infections in New York doubled,” CommSec’s morning update told us.

This shows US market sentiment can turn on a dime (as the Yanks might put it) but it’s too early for any positive spinning yet. That said, that jobs number was a bonus. Imagine if it had been an absolute shocker!

To the local story and our S&P/ASX 200 Index lost 225 points (or 3.5%) over a week of ups and downs but the latter won the battle, though that shouldn’t surprise. There simply hasn’t been enough good news, however, our Government is starting to get the dialogue to us a little more right to help stocks beat their battle with gravity. Words like “stimulus package” and “business investment allowances” and “tax cuts” are all the right communiques when stock markets are worried about something like a potential pandemic.

The cost of this damn virus to our portfolios is 13.2%, if your collection of shares track the index. And banks copped it because of the RBA’s cash rate cut on Tuesday, which was passed on in full.

This is the sad story for the banks: CBA lost 9.6% to $73.93, NAB was slugged 12.4% to $22, ANZ 10.8% to $22.14 and Westpac 9.7% to $21.35.

Travel-related stocks were crushed, with Qantas down 15.7% to $4.66 and Flight Centre plunged 18.8% to $26.50 – but doesn’t the small 6% fall in Sydney Airports give us a clue about the value of being the only game in town!

Fund management’s copped it, with Platinum off 17.2% and Pinnacle Investments down 17.2%. These are tough times for businesses that primarily deal in stocks that are in a virus-scaring slide. A great company such as Magellan Financial Group is down about 29% since its high of $74.75 in mid-February!

And then there were the miners, with BHP down 4.2%, Rio off 1.2% and Fortescue 4.8% lower. They’re pretty small drops but BHP, since its February high, is down around 16%.

On Monday, I will look at the stocks that have stood strong against the virus-driven sell off, but clearly CSL and the gold miners gave it to the Coronavirus but there were some others that are worth thinking about.

What I liked

  • Australia’s record economic expansion is well into its 29thyear. The Australian economy grew by 0.5% The biggest contributions to growth came from household consumption.
  • The RBA cut is a plus, though I’d prefer no cut and lots of budget spending.
  • ANZ job advertisements rose by 0.7% in February, after rising by 4% in January.
  • Gross value added per hours worked in the market sector rose by 0.2% in the December quarter, to be up by 0.2% on the year. Hours worked in the market sector rose by 0.3% in the December quarter and were up by 1.5% on the year.
  • The broadest measure of international trade – the current account – was in surplus by $955 million in the December quarter. Over the year, the surplus was a record $10.3 billion. Net exports (exports less imports) will add around 0.1 percentage point to economic growth in the December quarter.
  • The Fed cut the official cash rate by 0.5%.
  • The ISM services in the US index rose from 55.5 to 57.3 in February (forecast 54.9).
  • The ADP survey of private sector payrolls show that jobs rose by 183,000 in February (forecast 170,000).
  • The IBD/TIPP economic optimism gauge in the US fell from 59.8 to 53.9 in March (forecast 58.1).
  • The ISM manufacturing index in the US eased from 50.9 to 50.1 in February (forecast 50.5).
  • G7 finance ministers vowed to take all appropriate measures to support economies.

What I didn’t like

  • The Australian Industry Group (AiGroup) Performance of Construction Index (PCI) rose from 41.3 points to 42.7 points in February. The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell from 50.6 points to 49 points in November. A reading above 50 indicates an expansion of business activity.
  • In February, 79,940 new vehicles were sold, down by 8.2% over the year (but SUV sales in February were actually up 5.4% on the year). The rolling annual total of new vehicle sales in February was 1,045,422, down 8.1% on the year, after falling 8.2% in the year to January.
  • Council approvals to build new homes fell by 15.3% in January – the biggest fall in two years – to 13,016 units. Approvals are down by 11.3% from a year ago.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 3.2% to 104.8 points – the lowest level since 8 June 2014. Sentiment is below both the average of 114.1 points held since 2014 and the longer-term average of 113.1 points since 1990. The measure of economic conditions over the next 12 months (‘current economic conditions’) fell by 16.6% to a record low -25.4 points.
  • The (AiGroup) Performance of Construction Index (PCI) rose from 41.3 points to 42.7 points in February.
  • In February, 79,940 new vehicles were sold, down by 8.2% over the year. But SUV sales in February were actually up 5.4% on the year.
  • Company operating profits fell by 3.5% in the December quarter but profits in calendar year 2019 were up 8.1% on the year to record highs.
  • The ISM New York index rose from 45.8 to 51.9 in February.
  • US factory orders fell by 0.5% in January (forecast -0.1%).
  • Challenger reported that there were 56,660 job cuts in February (67,735 in January).
  • The Markit services gauge in the US fell from 53.4 to 49.4.

I’m keeping the faith

I know these sell-off episodes can be testing, so I thought I’d replay the chart I’ve been using to allay investors’ fears that stock markets eventually beat viruses and other medical emergencies that scare the pants off the world. Look at this chart.  The black dots are the various viruses of the past. See how the blue line rebounds strongly out of the black dots. This chart should help you have a good weekend.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday March 10 – NAB business survey (February)
Tuesday March 10 – Weekly consumer sentiment
Wednesday March 11 – Lending (January)
Wednesday March 11 – Consumer confidence (March)
Wednesday March 11 – Speech from Reserve Bank official
Wednesday March 11 – Labour account (December)
Thursday March 12 – Credit & debit cards (January)

Overseas
Tuesday March 10 – US NFIB Business optimism (February)
Tuesday March 10 – China Inflation (February)
Wednesday March 11 – US Consumer prices (February)
Wednesday March 11 – US Monthly Budget (February)
Thursday March 12 – US Producer prices (February)
Friday March 13 – US Trade prices (February)
Friday March 13 – US Consumer sentiment (March)
Friday March 13 – China New vehicle sales (February) 

Food for thought:

“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” – Dave Ramsey

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:

AMP Capital’s Shane Oliver shared this chart that looks at the number of coronavirus cases worldwide along with Google searches for ‘Coronavirus’ and ‘Hand Sanitizer’:

Top 5 most clicked:

Recent Switzer Reports:

Monday 02 March: How to play the current market

Thursday 05 March: Buy the opportunities

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.