Switzer on Saturday

Stocks surge on irrepressible optimism and lots of money!

Founder and Publisher of the Switzer Report
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The news is there is no news on who won the US Presidential election and therefore none of us can get any satisfaction on a result. With no certain outcome yet, we’re left scratching our heads at the unbelievable positive stock market reaction. But overnight in the US, enthusiastic stock buyers have paused, though optimists were helped by the US jobs report.

The figures out overnight have provided additional justification for this huge post-election rally, with 638,000 jobs created in October and the unemployment rate falling from 7.9% to, wait for it, 6.9%. Economists only expected a 7.7% number!

This is virtually saying that there’s even an economic justification for this surge in stocks, which was setting up the S&P 500 for the best week since April this year.

And it looks like being the second best week for stocks after a US election. This 7% gain for US stocks was only beaten by F.D. Roosevelt’s 1932 win in the guts of the Great Depression.

Here’s a quick summary of the US week that was:

  • The S&P 500 is up around 7% this week and at one point was 2% off its historic high of 3580.
  • Growth stocks (driven by tech) were up 9% but it was a win for all sectors, with large caps up 7% and small caps also up 7%.
  • It has been a global rally, with Europe’s Stoxx 600 up 7% and the MSCI Asia Pacific Index up 6%.
  • Japan’s market was up 6% and hit the best level since (wait for it) 1991!
  • And to prove my ‘everyone won this week’ view (apart from Donald Trump), gold had its best week since July.

But why has the uncertain election result delivered such stock price upside? Well first, a blue wave where the Democrats won the Presidency, the Senate and the House of Reps is unlikely. Second, the Republicans look set to win the Senate, which should protect the Trump tax cuts and reduce the likelihood of tough anti-company regulations coming down the pike, driven by a President Joe Biden and his Democrats.

That said, none of this is 100% certain, with disputed returns and possible court cases that could change the final outcome. If you like your stock prices rising, don’t even think a blue wave is possible.

And if you need additional support to remain a believer in this rally, legendary US value-investor Bill Miller, emphasised on CNBC that “this is still a bull market.”

All this despite the US daily cases of COVID-19 hitting a single-day record of 120,000! And it was only a day after the States saw a record 100,000 cases! This brought 1,200 deaths, with 53,000 Americans in hospital because of the virus and has to be the main reason President Trump is right now fighting for his political life.

To the local story and it has been four weeks since we had a stock market performance like the one that just passed, with the RBA and its “rates on hold” for three years’ promise (plus its QE play all rolling into an acceptable US election outcome) producing a 263-point (or 4.4%) gain for the S&P/ASX 200 Index, which finished at 6190.19.

Gee, a week is a long time in the stock market! And what about the fears of record spikes of Coronavirus cases in the US and Europe? And what about actual and potential worldwide city closures that have to reduce the power of the 2021 economic rebound?

It’s what it is, but anyone witnessing all this can see (if and when a vaccine shows up) the power of positivity plus the world living on QE and budget deficits on steroids could create a boom of unbelievable economic growth.

S&P/ASX 200 one month

This one-month chart shows how happy stock players are that the Democrats didn’t get a clean sweep or blue wave.

Interestingly, ‘economy reopening’ trade stocks were popular again, and while they are stocks I like, they seem to be rising well ahead of time. But that’s the stock market!

Flight Centre was up 24.4% to $14.01, after better revenue was reported. Webjet put on 20.3% to $4.20 and after my interview with the company’s MD, John Gusic this week, I’m not surprised the share price has jumped but it’s more than what I expected. Completing the better travel picture, Corporate Travel wacked on 14.7% to $16.74.

Other winners were Tabcorp, up 24.6% after takeover rumours, News 19.2% higher on a better earnings report and Vicinity Centres rose 15.7% on Victoria reopening.

Poor old Treasury Wines (TWE) is still copping the Chinese ‘water torture’ treatment, with threats of bans. Its share price fell 4.6% to $8.75.

What I liked

  • The Reserve Bank has ruled out further rate cuts: “The Board is not contemplating a further reduction in interest rates.” The focus now is on bond buying, which is QE or quantitative easing.
  • The AIGroup PSI rose by 15.2 points to an 11-month high of 51.4 in October. A reading above 50 signifies expanding activity.
  • The AiGroup Performance of Manufacturing Index rose from 46.7 in September to a 2-year high of 56.3 in October. And the ‘final’ IHS Markit Manufacturing Purchasing Managers’ index eased from 55.4 in September to 54.2 in October. Readings above 50 indicate an expansion in activity.
  • Retail trade rose by 6.5% in the September quarter (survey forecast: 6%).
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.2% to an 8-month high of 99.9 (long-run average since 1990 is 112.6). Confidence has lifted in 11 of the past 12 weeks. Sentiment is up by 53% since hitting record lows of 65.3 on March 29 (the lowest since 1973).
  • Consumer views on family finances over the next year (‘future financial conditions’) rose by 1.3% to a 20-week high of 20.1 points.
  • According to the Commonwealth Bank (CBA), card spending in the week to October 30 lifted 5.7% on a year ago, compared to a 4.4% lift for the previous week.
  • Council approvals to build new homes rose by 15.4% – the biggest rise in seven months (consensus: 1.5%).
  • The value of new loan commitments for housing rose by 5.9% in September, after lifting by a record 12.6% in August. Loans are up almost 34% in four months.
  • The CoreLogic Home Value Index of national home prices rose 0.4% in October – the first monthly increase since April. Prices were up 3.9% over the year. Capital city home prices lifted 0.2%, with Melbourne the only city to post a decline in prices (down 0.2%). Regional home prices outperformed, up 0.9% in October – the most in 3½ years.
  • The trade surplus rose by $3 billion to $5.63 billion in September. Australia has posted 33 successive monthly trade surpluses.
  • New vehicle sales totalled 81,220 units in October (down just 1.5% on October 2019), which was the smallest annual decrease in 30 months. It’s a drop but says we could be close to a rise!
  • The US ISM services index fell from 57.8 to 57.6 in October (survey: 57.5) but it was a small fall. Any number over 50 says expansion for the sector. The ‘final’ IHS-Markit services index rose from 54.6 to 56.9 in October (survey: 56).
  • The ISM manufacturing index rose from 55.4 to 2-year highs of 59.3 in October (survey: 56). The ‘final’ IHS Markit manufacturing index lifted from 53.2 to 53.4 in October (survey: 53.3). Construction spending rose by 0.3% in September (survey: 1%).
  • The US Federal Reserve kept interest rates anchored at 0%-0.25% and made no changes to its asset purchases. Policymakers said: “Economic activity and employment have continued to recover but remain well below levels at the beginning of the year.”
  • Challenger reported a 32% fall in job cuts in the US to 80,666 in October (survey: 95,000).
  • US factory orders rose by 1.1% in September (survey: 1%)
  • The exporter-heavy German Dax index gained 2%, as the IHS Markit’s survey showed factories in Europe’s largest economy saw record growth in new orders in October.

What I didn’t like

  • Lockdowns in Europe.
  • This from Shane Oliver: “The surge in new global coronavirus cases continued over the last week being led by developed countries notably Europe and the US. Developed countries are now seeing a million new cases every four days.”

Likes versus dislikes!

Have a look at the list of likes and note that my dislikes aren’t connected to economic data. Right now (as shown by the US jobs report overnight), the data flow is heading in a positive direction. However, we have to watch the second-wave infections and the government responses worldwide, as they will affect the size of the economic rebound in 2021.

This also underlines how lucky we are here (Victoria aside) with how we’ve managed this damn virus.

Given how the Yanks have driven up stock prices this week (despite their electoral uncertainty and infection surge), you have to hope nothing KO’s their irrepressible optimism.

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday November 9 – RBA credit & debit card lending (September)
Monday November 9 – CommSec Home Size Report 2019/20
Tuesday November 10 – Weekly consumer sentiment (November 8)
Tuesday November 10 – CBA credit/debit card spending
Tuesday November 10 – NAB business survey (October)
Wednesday November 11 – Consumer confidence (November)
Thursday November 12 – Overseas arrivals/departures (September)
Friday November 13 – Provisional overseas travel (October)

Overseas
Monday November 9 – US Consumer inflation expectations (October)
Tuesday November 10 – US NFIB Business optimism (October)
Tuesday November 10 – US JOLTS job openings (September)
Tuesday November 10 – China Inflation (October)
Thursday November 12 – US Consumer prices (October)
Friday November 13 – US Producer prices (October)
Friday November 13 – US Consumer sentiment (November)
Friday November 13 – China New vehicle sales (October)
Friday November 13 – China Lending (October)

Food for thought:

“Learn every day, but especially from the experiences of others. It’s cheaper!” – John C. Bogle

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 S&P 500 closed 2.20% higher on Wednesday US time, the largest gain ever for the index on the day following a presidential election as shown in this chart from CommSec:

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.