Switzer on Saturday

Get ready for the reopening trade

Founder and Publisher of the Switzer Report
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September is the month I get cautious about stocks. October is another month I want to get over and done with. Both these months are stock market crash-prone. When I was preparing to write this on Friday, the S&P 500 was down about 7%. Ours was off about 5%. But it’s the tech-heavy Nasdaq that’s in most trouble, off 10.5%.

Am I worried?

Not at this stage, as it looks like an overdue pullback, where smart fund managers would be taking profit, which they’ll display in their September quarter show-and-tell results. And we know tech stocks have gone crazy. A lot of it was on their appropriateness for a locked-down, work-from-home and buy online world. If a vaccine is coming (and the boss of Pfizer indicated October is a chance and Donald Trump speculated “a few weeks”), then wouldn’t the stocks that did really well in a Coronavirus-infected world give way in popularity to those that were smashed and deserted since late February?

To the local story in case you missed it, for the week we were up only 5 points to 5864.50 but it stopped us being down for five weeks in a row.

The chart below shows you what you might have missed — a 5% pullback of the S&P/ASX 200 Index.

S&P/ASX 200 (one month)

It’s been a rotation out of tech, especially in the US, which has helped other companies, particularly some ignored value ones. The S&P 500 has become a growth-dominated index, which is why index investors might be in for a less-than-uplifting time in coming months.

Webjet (WEB)

Webjet is up 21% since August 24, even with its MD selling the stock! This has to be investors taking a position on a reopening in 2021, which a classic “out of growth and into value” play.

That said, the arrival and availability of a vaccine “will lift all boats” and indexes will head higher. A vaccine is the economic gamechanger that stock market optimists have to have.

Right now our banks should be gainers with the rotation trend but they’re so heavily involved in the resuscitation of the economy, you just can’t expect anything spectacular for their stock prices until a more normal economy reasserts itself. These stocks are for the long-term investor but it’s a tougher play nowadays because dividends aren’t going to be ‘normal’ for at least a year, maybe two!

AMP speculators had a tough week, with the company down 9.1% for the week.

Miners did well, with BHP up 3.4%, but Fortescue copped a downgrade and lost 5.48% over the week. It has had a spectacular run and we might see a buying opportunity in coming weeks.

And gold has some admirers. The stock we pinpointed last week, Newcrest, is up a nice 5% but that glittering Northern Star did it again, up 11.8%.

Here are the sector moves via Bloomberg and the AFR.

What I liked

  • The unemployment rate fell from 7.5% to 6.8% when economists expected it to rise to 7.7%!
  • Employment rose by 111,000 in August, despite economists tipping there’d be a 35,000 loss of jobs! Full-time jobs rose by 36,200 and part-time jobs rose by 74,800.
  • Meanwhile, July’s jobs rise was corrected up from 114,700  to 119,200.
  • Full-time jobs rose by 36,200. Part-time jobs rose by 74,800.
  • Even the participation rate rose from 64.7 to 64.8.
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.4% to 92.4 (long-run average since 1990 is 112.6). Confidence has lifted in four of the past five weeks. Sentiment is up by 41.5% since hitting record lows of 65.3 on March 29 (the lowest since 1973).
  • According to the Housing Industry Association, private house sales rose 3.6% in August. Sales for the three months to August were up 36.5% on a year ago.
  • The Bureau of Statistics reports that Australian home prices fell by 1.8% in the June quarter to stand 6.2% higher over the year. (I know it’s a fall but it’s a small one. Considering we’re in a 7% contracting recession, that’s a good result.)
  • Last week, the measure of whether it was a ‘good time to buy a major household item’ rose by 5.3% to 1.8 points – the highest level in 11 weeks.
  • According to the Commonwealth Bank (CBA), card spending in the week to September 11 was up 4.7% on a year ago, compared to a 5.2% lift for the week ended September 4.

Online spending rose 17.4% on a year ago (previous week: +21.9%), but in-store spending was down 0.6% (previous week: minus 2.1%).

  • In vaccine news, UK trials of the University of Oxford/AstraZeneca coronavirus vaccine resumed, after it was concluded that the illness of a participant was unlikely to be related to the vaccine.
  • US retail sales were up 0.6% in August, slightly less than economists expected.
  • US Industrial production rose 0.4% in August for its fourth consecutive monthly increase. (However, even after the recent gains, the index in August was 7.3% below its pre-pandemic February level.)
  • US homebuilder conditions rose in September to their highest level in over 35 years. And manufacturing conditions in the NY region rebounded, and remained strong in the Philadelphia region. Continuing jobless claims fell.
  • China’s retail sales expanded at a 0.5% annual rate in August (consensus: flat). Industrial production rose at a 5.6% annual rate (consensus: 5.1%). Fixed-asset investment contracted by 0.3% over the eight months to August from a year ago (consensus: minus 0.4%). The Chinese economy is coming back!

What I didn’t like

  • The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) released a report during the week estimating that the value of agricultural commodity exports could fall by 10.2% to $43.5 billion in 2020/21.
  • The stock market reaction to the Fed’s dot plot of Fed officials interest rate expectations, which showed no hikes in rates out to 2023, despite an expected fall in unemployment to 4% and a rise in inflation to 2%. Stocks sold off, meaning the market feared the possible long road to recovery rather than the prospect of low rates for a long time.
  • The BoE is now considering negative interest rates, which isn’t a good sign.
  • The rise in Coronavirus cases in Europe.

For those worried

I have to share this little quote from AMP Capital’s Shane Oliver, who last week looked at US economic data, which makes him pretty positive on stocks and this might be why: “September quarter GDP is now on track to expand 8% or so, almost recouping the 9% decline seen in the June quarter.”

This shows how economies can rebound out of the craziness of a Coronavirus closedown. If it wasn’t for Victoria’s problems, I could be predicting surprisingly great things for our September quarter.

That will have to wait for the December quarter but smarties are already buying those companies that are benefitting from what’s called the “reopening trade”.

By the way, the only thing to worry about is if we get terrible news about a vaccine — that could give us a September or October crash! Don’t go there!

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead: 

Australia
Tuesday September 22 – Speech by RBA Deputy Governor Guy Debelle
Tuesday September 22 – Weekly payroll jobs & wages (September 5)
Tuesday September 22 – Consumer confidence index (September 20)
Tuesday September 22 – CBA credit & debit card spending (September 18)
Wednesday September 23 – Markit purchasing managers’ indexes (Sep.)
Wednesday September 23 – Preliminary retail trade (August)
Wednesday September 23 – Skilled internet job vacancies (August)
Thursday September 24 – Finance & Wealth (June quarter)
Thursday September 24 – Business impacts of COVID-19 survey (Sep.)
Thursday September 24 – Detailed labour force (August)
Thursday September 24 – Population statistics (March)
Friday September 25 – Preliminary international trade (August)

Overseas
Monday September 21 – China Loan prime rate announcement (Sep.)
Monday September 21 – US Chicago Fed national activity index (August)
Tuesday September 22 – US Existing home sales (August)
Tuesday September 22 – US Richmond Fed manufacturing index (Sep.)
Wednesday September 23 – NZ Reserve Bank interest rate decision
Wednesday September 23 – US MBA mortgage applications (September 18)
Wednesday September 23 – US FHFA house price index (July)
Wednesday September 23 – US Markit purchasing managers’ indexes (Sep.)
Thursday September 24 – US New home sales (August)
Thursday September 24 – US Kansas City Fed manufacturing index (Sep.)
Thursday September 24 – US Federal Reserve Chair Powell testimony
Friday September 25 – US Durable goods orders (August)

Food for thought:

“I don’t create companies for the sake of creating companies, but to get things done.” – Elon Musk

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:

Fidelity shared the following chart scoring the valuation of technology stocks in the S&P 500. As Fidelity explains:

“Our proprietary valuation score uses forward price-to-earnings relative to the overall index, enterprise value-to-sales, and price-to-book ratios, then compares the average of these measures to the company’s history of up to 15 years. The result is a decile score, with a 1 meaning it’s in the bottom 10 per cent of its valuation history.”

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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.