Switzer on Saturday

The Virus likes are giving me market optimism

Founder and Publisher of the Switzer Report
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This week in Switzer Daily I stole a Tom Petty song title and argued that when it comes to the Coronavirus and what the stock market, the Government and the economy will do, “the waiting is the hardest part”.

We’re waiting on the infection and death rate numbers to make sure it’s safe to go back to work and normality. We’re waiting for the end of lockdowns to spark business and the economy, which will either keep the current uptrend going or take us into another leg down.

And then there’s the really important wait for enough time after social restrictions are eased to see if a second wave threat of infections could again close down the economy. Second-wave infections occurred in the 1918 Spanish flu outbreak. And recently in Singapore and Japan (which were seen as models of containment), we’re seeing evidence of possible second-wave activity. However AMP Capital’s Shane Oliver thinks “they really still seem to be in part of a first wave, as their quarantining efforts failed.”

We don’t need or want this revisitation of the virus reinfecting us and bringing new fatalities. And the stock market would take another big drop, if second waves started to spook governments into lockdowns and closures again.

Right now, we’re waiting for the progressive reduction of social restrictions and what happens in the early movers such as Germany, Austria, Denmark and US states like Georgia, whose Governor, Brian Kemp, has decided to re-open barber shops, gyms, tattoo parlours, restaurants and other businesses. Second-wave problems in these places will spell trouble for stocks.

That’s why fund managers like Geoff Wilson, Roger Montgomery and Magellan’s Hamish Douglas are holding cash. They expect another buying opportunity leg down (whatever the cause). But I bet you they were buyers on the first dive of the market. This week, I interviewed Hamish on my Switzer Show podcast. I encourage you to listen to what was our 100th show.

In working out whether there’ll be another big leg down, you need to know where we’ve been. Our market fell 37% compared to the US, where the drop was 34%. The Yanks have rebounded 25%, while we’ve only regained 15%. Some part of the slow bounce back could be due to super funds selling shares to get liquidity ahead of members demanding their potential $20,000 out of their funds, following the Government’s decision to let those under pressure from its Coronavirus containment policies access their money.

That said, given our current success fighting the virus, we have the potential for a big jump in stock prices when we get an “all clear” sign, if that’s possible!

You also have to take into account that the strong rebound of Wall Street leaves it vulnerable to a sell off in the short term – particularly as we’ve now entered a period that’s likely to see very weak economic data and news on profits. Oil and virus news could be spanners in the works but could also be positives that could take us higher – that’s the gamble we all have to face right now.

So it gets down to jump on the uptrend or wait for another leg down. At times like this, I like to check out the charts. Michael Gable of Fairmont Equities is preparing them for Monday’s story but he let me have this preview. “S&P 500 is in a region of resistance where this uptrend from the last few weeks may slow down,” he said yesterday. “That doesn’t mean we get a big pullback. We could just go sideways for a bit. I am also of the view that going back to the March lows is very unlikely.”

He clearly thinks those low levels on the S&P 500 and the S&P/ASX 200 of 4546 is unlikely, though he’s not ruling out another drop. And Wall Street looks likely to be the driver of any sell off or leg up.

Overnight, US stocks were up on better oil prices and hopes remain about a Coronavirus treatment from Gilead Science, despite its China trials not helping optimism over the past week. There seems to be some argy bargy over the Chinese trials and Wall Street wants to focus on some US trials due to report soon.

To the local story, and Australian shares were dragged down by around 4.5% for the week by the poor global lead, with energy shares down again. But the biggest falls were actually in property, industrial, retail and health stocks.

The S&P/ASX 200 Index ended at 5242.6, off 244.9 points. This was the fourth worst week over the past year. Oil didn’t help energy stocks and financials have struggled and are again moving into buying territory. The CBA lost 3.6% to $58.88, ANZ gave up 3.3% to $16.02, NAB slipped 3.8% to $15.76 and Westpac dropped 3.4% to $15.33.

This Bloomberg/AFR chart gives a good snapshot of how all sectors copped it.

If the worst of virus news worldwide keeps on improving in coming weeks, we could see a surprisingly good rebound, given how weak our comeback has been to date. But of course, that’s the most important wait and market determinant going forward.

What I liked

  • Despite earnings downgrades outnumbering upgrades 5 to 1, Bank of America noted that it’s not all bad news. In the past when the one-month Global Ratio was near these levels, the MSCI Index averaged 40% in the next 12 months.
  • This view on when the US economy re-opens: “The market is getting used to the fact that maybe it’s going to be late May, maybe June before the economy is re-opened,” said Daniel Deming, managing director at KKM Financial on CNBC. “So the question underneath this market is whether there is enough stimulus, enough liquidity to continue to support this market structure.” (The Yanks might have to spend more but the Morrison Government has been one of the biggest spenders as a percentage of GDP.)
  • Despite bad economic news on Thursday in Europe and the USA, European markets rose, with Italy up 1.5%, UK and Germany up 1%.
  • The US has agreed another stimulus package totalling $US484 billion (2% of GDP) mostly for small businesses, with more stimulus still being talked about.
  • How unimportant international travel is for our economy! Shane Oliver again: “In the absence of a vaccine, full international travel is likely to be the last thing to return. That’s not great but given that in net terms it’s worth less than 0.5% of GDP to the Australian economy, it’s trivial compared to the 10-15% hit that’s come from shutting or partially shutting about 25% of the economy, as it would be this mainly domestically driven activity that would bounce back as the shutdown is eased.”
  • The optimistic view on China from Morgan’s chief economist, Michael Knox: “In China, the perception of risk to the Chinese economy of a resumption of coronavirus is far less than that risk to the Chinese economy is perceived in the west,” he wrote this week. “Should the Chinese leadership be right, we will see a rapid reacceleration of the Chinese economy, which should absorb all of the loss of output this year. After a 9.8% fall in GDP in Q1 2020, the Chinese economy is assumed to grow by 11% in the only three quarters remaining in 2020. This provides a final result of 1.2% for calendar 2020. The economy is then expected to grow by 9% in 2021.” That has to be good for our economy!
  • The flattening of the infection and death rate curves in Italy, Europe and the US. And what about our effort!

What I didn’t like

  • Reports about shocking economic data – but what can anyone expect? It’s terribly important if this virus madness is sustained but it will be meaningless if we have a surprisingly good outcome. Waiting! Waiting!
  • The oil price madness, though the signs are improving.
  • The bad news on the trials of the Gilead Science’s Coronavirus drug treatment trial. The results came from a Chinese trial – and while the company questioned the actual trial, the market did lose the excitement that took stocks higher last Friday.
  • Knox’s alternative negative view: “Should the Chinese leadership be wrong, there may be a significant recurrence of Coronavirus when China gets into winter. This would damage Chinese output in the fourth quarter of 2020 and the first quarter of 2021. Should another wave of infections arrive, then the positive outlook suggested by the IMF is significantly at risk. That IMF guess was ‘after growth of 6.1% last year, the Chinese economy will grow by 1.2% this year and accelerate to 9.2% in 2021’.”
  • Comments like these from economists such as Shane Oliver: “Economic activity data is literally falling off a cliff. This was highlighted last week by the IMF’s forecast for a contraction in the global economy of 3% this year and in advanced economies of around 6%. And this masks a likely 10 to 15% slump in GDP centred on the June quarter. Falls of that magnitude have not been seen since the Great Depression. The collapse in economic activity in the US and Australia is highlighted by weekly economic activity trackers we have constructed based on data for things like restaurant bookings, energy usage, confidence, foot traffic and jobs.”

The waiting game

Knox’s conclusion: “We are left with two forecasts: An optimistic outlook of the IMF based on low Coronavirus impact in China and a more pessimistic outlook based on a high impact of Coronavirus, should it return in winter. We’ll have to wait until the end of winter to find out which forecast is correct.”

As Tom Petty and I have argued, “The waiting is the hardest part.” That said, I think my list of likes is starting to take ground off the dislikes.

PS: Shane got this quote from me!

“From a fundamental investment point of view the historical experience that covers recessions, wars and even pandemics (in 1918) tells us that the long-term trend in shares and other growth assets is up and that trying to time bottoms is always very hard. No one will ring the bell at the bottom, which by definition will come at a time of maximum bearishness when all the news is horrible. Maybe the low was back in March, maybe it wasn’t. To borrow from John Kenneth Galbraith’s famous quote on forecasters I will admit that I know that I don’t know. So a good approach for long-term investors is to average into markets after bear market falls over several months.”

(I interviewed Shane this week and told him how I interviewed Galbraith after the 1987 stock market crash. It’s good to see Shane using my stuff, because I sure use a lot of his!)

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday April 27 – State of the States
Tuesday April 28 – Weekly consumer sentiment
Wednesday April 29 – Consumer Price Index (March quarter)
Thursday April 30 – International trade prices (March quarter)
Thursday April 30 – Private sector credit (March)
Friday May 1 – CoreLogic Home Value Index (April)
Friday May 1 – Producer price indexes (March quarter)
Friday May 1 – AiGroup & CBA purchasing manager indexes

Overseas
Monday April 27 – China Industrial profits (March)
Monday April 27 – US Dallas Federal Reserve index (April)
April 28/29 – US Federal Reserve meeting
Tuesday April 28 – US Consumer confidence (April)
Tuesday April 28 – US S&P/Case Shiller home prices (February)
Tuesday April 28 – US Richmond Federal Reserve index (April)
Wednesday April 29 – US Economic growth (March quarter)
Wednesday April 29 – US Pending home sales (March)
Thursday April 30 – US Personal income (March)
Thursday April 30 – US Employment cost index (March quarter)
Friday May 1 – Manufacturing purchasing manager indexes
Friday May 1 – US Construction spending (March)

Food for thought:

“We need to be creative. We need to show initiative. We need to come up with new ideas. We have to be innovative. That’s so important to all of us being able to get through this.” – Mark Bouris 

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 following chart of CBA’s purchasing manager index published by the AFR shows how the manufacturing and services sectors have been affected by the coronavirus:

Top 5 most clicked:

Recent Switzer Reports:

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.