Switzer on Saturday

It’s headwinds now but soon we’ll see tailwinds

Founder and Publisher of the Switzer Report
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If you need reminding about the headwinds buffeting the stock market right now, well, you haven’t been paying attention. Over September, the S&P 500 Index was off 4.7%, while the Nasdaq gave up 5.3%. The accumulation of headwinds has to be blamed, with ‘cyclone’ Jerome Powell and his Fed, combined with inflation concerns, being the biggest ill-winds for stocks.

Last week I ran through those headwinds but they need to be repeated, so you can appreciate if these problems for your portfolio are likely to be short or long term. Working this out and being right could have a big bearing on the returns you’re likely to pocket over the next 12 months.

Here are the headwinds that explain why negativity is prevailing for stocks:

  1. Many central banks are still leaning hawkish and warning of higher rates for longer.
  2. Sticky inflation.
  3. Rising bond yields pressuring share market valuations.
  4. The higher risk of recession.
  5. The rebound in oil prices.
  6. China’s economy still at risk.
  7. Continuing geopolitical tensions.
  8. The weak seasonal period for shares into next month.
  9. The very high risk of a US government shutdown from October 1.

Overnight, as October 1 looms, the potential US government shutdown is the new most important concern for Wall Street, with two million government workers potentially to be furloughed or working without pay! The US is an odd place, isn’t it?

Ironically, this worry, which historically has only ever been a small hit to the share market, has taken precedence on the New York Stock Exchange, as some good news on inflation was released! More importantly, it was an inflation reading that the Fed takes very seriously, and it’s called the personal consumption expenditures price index (PCE). This ignores volatile food and energy prices, so it’s like a core inflation statistic. It rose by a small 0.1% in August, taking the annual number to 3.9%. Economists had tipped a 0.2% rise, so it was good news.

But the bad news was that the Republicans said “No” to a short-term funding bill on Friday. This was meant to keep key government departments open for another month, which would’ve given Congress more time to wrangle a deal on the country’s public debt, which, in gross terms, is around $US33 trillion.

Chris Fasciano, portfolio manager at Commonwealth Financial Network in the US, summed up the issue neatly with the following: “The market will also need to deal with what appears to be a likely government shutdown — how long it lasts and how it effects short-term economic data, consumer confidence and interest rates will be amongst key topics for investors to pay attention to.” (CNBC)

Note, he did say “short term”. He too is using the history of previous shutdowns and their impact on stocks. Undoubtedly, the extreme-right Republicans are doing this ahead of an election year, but it’s unlikely that they’ll let this political stunt become a serious, longer-term economic problem for voting Americans and stock players. Well, let’s hope they’re as rational as me but when it comes to politicians, assuming rationality can be a mistake.

These once-a-term debt debacles in the US remind me of two amusing observations from former President Ronald Reagan. The first was: “Politics is supposed to be the second-oldest profession. I have come to realise that it bears a very close resemblance to the first”. And then there was this one: “Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other”.

The table below shows that only once did the S&P 500 fall a lot — 10.43% in 2018-19 with a 22-day shutdown. But there were other market-worrying Donald Trump/Fed rate cut issues then as well.

In fact, by early 2019, Powell was bullied into more rate cuts, and stocks powered up around 40%, before they were trumped by the Coronavirus crash of March 2020.

Right now, I’m focussing on the bigger issues of inflation and the Fed and 2024, when I think interest rate rises will be over and talk about cuts and economic slowdowns will be the debated concerns for stocks.

For the record, the Dow dropped 158 points on Friday, the S&P 500 gave up 11 points, but the NASDAQ was up 18 points. This underlines how the government shutdown issue isn’t as dramatic as it sounds to the market.

To the local story, and the S&P/ASX 200 rose 0.3% (or 23.8 points) on Friday to 7048.6. Surprisingly, the index was actually up 0.28% for the week. However, it was a shocker of a month for stocks with, as I said earlier, the market down 3.5%!

The miners bounced back on Friday, with BHP up 1.2% to $44.25, Fortescue rose 1.3% to $20.92 and Rio put on 1% to $113.55.

The AFR reported that “shares in lithium minnow Core Lithium surged 19.1 per cent to 40.5 cents and it was the best-performing stock on the gauge after it reported its first full-year profit as a lithium producer. Core reported a net profit of $10 million and revenue of $50.6 million”.

Here are the big winners and losers for the week, thanks to Bloomberg and the AFR:

What I liked

  1. This from AMP’s Shane Oliver: “The trend remains down in Australian inflation, but inflation is still too high. The good news is that all the rebound in inflation in August was due to a 9.1% rise in auto fuel prices that added 0.3% to inflation”.
  2. The RBA is expected to leave rates on hold at 4.1% on Tuesday.
  3. Australian economic data was soft. Retail sales rose 0.2% in August, up just 1.5% on a year ago and less than economists expected.
  4. Job vacancies show that the labour market is still tight but is rapidly cooling. The ABS survey of job vacancies fell 8.9% over the three months to August, leaving them down for five quarters in a row by 18%.This shows rate rises are working.
  5. US economic data was mostly soft. Consistent with this, new and pending home sales fell sharply in August. Consumer confidence fell partly reflecting the rebound in gasoline prices and perceptions of whether jobs are easy to get remained well down from its highs. Capital goods orders, excluding volatile items, rose slightly, but look flat since mid-last year.

What I didn’t like

  1. September! It’s nearly always the scariest months.
  2. From their July highs, US shares have had a fall of 7% and global and Australian shares have had falls of 6%.
  3. Congress needs to pass a new budget or a continuing funding resolution by 1 October, the start of the new fiscal year, to avoid a shutdown.
  4. After falling more than expected in July to 4.9% year-on-year, the Australian Monthly Inflation Indicator rose in line with expectations in August to 5.2% and you can blame OPEC and Russia for pumping up petrol prices.

The most important headwind

The main game for stocks is inflation and what the Fed is likely to do. The good PCE number overnight was a plus, but next week’s job numbers need to show that the labour market in the US is softening. The Fed needs to have signs that it should stop worrying about inflation and be jittery about their rate rises causing a recession.

And as long as the market thinks it will be a mild recession, then US stocks can take-off again, as they did from March 10 to late July, which ultimately will be a stimulant for our market.

 

The Week in Review

Switzer TV

Switzer Report

Switzer Daily

The Week Ahead

Top Stocks — how they fared.

 

Chart of the Week

The CBA economics team said: “Retail trade rose by 0.2%/mth in August 2023. The result split the difference between our forecast of a 0.1%/mth gain and the market consensus, which was looking for +0.3%/mth. Through the year, retail spending is just 1.5% higher, despite continued high inflation and record population growth. The ABS noted that the trend annual growth rate of 1.3% is the lowest in the history of the series, dating back to 1982!” (My exclamation point!)

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

Revelation of the Week

On ABS jobs data, this is what the CBA economics team reported: “Weakness in the job vacancies data was expected given timelier reads for measures of online job advertisements. But the magnitude of the decline in job vacancies was surprising. These measures of job advertisements, including the government’s Internet Vacancy Index, and private providers such as SEEK and Indeed, showed between a 0 to -3% decline in online job ads from three months prior.”

 

Disclaimer

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.