Switzer on Saturday

A few tricky weeks for stock players ahead

Founder and Publisher of the Switzer Report
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Despite rising bond yields and the growing uncertainty, as well as the implications of who will win the US election, Wall Street is doing its best to resist gravity. The Dow Jones index was in negative territory for most of the trading day on Friday, while the S&P 500 fought hard to remain positive, but the Nasdaq was defiantly in the green.

While this is a nice sign for an optimist, the realist would ask why does the US market continue to buy big tech, when valuations look excessive? The stock market script was supposed to be inflation down leads to interest rate cuts leads to a gradual rotation out of big tech and into smaller companies hit by the 11 rate rises the Fed imposed since 2022.

However, the combination of a stronger-than-expected economy in the States and the threat of Trump tariffs potentially being inflationary (which suggests less rate cuts are coming) have raised question marks over that script.

And there’d be US market analysis who would agree with the work of Professor Warwick McKibbin. McKibbin calculates that the Trump tariffs would not only lead to US inflation but the reciprocation effect of say Europe hitting the US with 10% tariffs and China replying with 60% get-even tariffs would push up worldwide inflation.

He also calculates the US economy would lose about 1% of its economic growth over the next four years.

Now, this is all economic and political speculation but it’s not anything that would encourage over-the-top stock market investments. That explains a lot of what we’re seeing right now and the week ahead could bring volatility in spades.

This is why:

  1. It’s the last full week of trading before the November 5 election.
  2. Five of the Magnificent Seven companies report next week. We’ll see how Alphabet, Microsoft, Meta Platforms, Amazon and Apple are performing and whether their share prices are justifiable.
  3. Friday brings the big market impacting jobs report. If it’s another blockbuster, future rate cuts will be trimmed back, and bond yields will rise.
  4. And on top of that, the Yanks get 3rd quarter economic growth.
  5. But wait there’s more, with the Fed’s most important inflation measure, the core PCE price index, out on Thursday. This will give the market a complete picture on whether the Goldilocks scenario of ‘no recession, no excessive boom and falling inflation’ is still a believable scenario for stock players.

If it’s not, we’ll see a sell-off. But if it’s seen as a credible take on the future, stocks will continue to creep higher.

It’s a huge week and watching the bond market’s reaction to the data drops will be crucial to what happens to stock prices. This from Phillip Colmar, managing partner and global strategist at MRB Partners, sums up the importance of bonds at the moment: “Yields have risen meaningfully, and so I think that’s been an issue for the equity market. On one hand, you’ve got earnings that are decent, but then you end up with rate cuts, which should be positive. However, the rates that matter right now are bond yields [and] that has caused a lot of uncertainty…”

To the local story and a ‘de-Whited’ Wisetech helped the S&P/ASX 200 add 0.1% on Friday but the index slipped 0.9% for the week to finish at 8211.3. Wisetech didn’t help the tech sector, but all was forgiven in the eyes of the brokers, after Richard White resigned as CEO. That said, you must think that its all-important strategist being sent to the sin bin could have an impact on the company’s performance going forward.

Meanwhile, the ATO problems of Mineral Resources’ MD and major shareholder Chris Ellison didn’t help the market, with Australian Super admitting it had reduced its stake in the company.

Overall, it was a tough week, not helped by the looming US election and rising bond yields but here were the companies that starred and struggled:

The Stars…

  1. Qantas flew 7.42% higher to $8.03 on Jetstar’s outperformance.
  2. Bellevue Gold was up 7.24% to $1.63.
  3. Stanmore Resources added 7.36% to $3.14.
  4. HMC Capital was up 9.75% to $10.36 on the purchase of Global Switch Australia.

And the Strugglers…

  1. Mineral Resources was down 17.39% on Ellison issues.
  2. Flight Centre was down 8.41% to $15.89.
  3. Reece plummeted down 11.5% to $23.71.
  4. Newmont lost its glitter, down 17.56% to $70.74 on cost blow outs.
  5. The Star lost 5.36% to $0.27.
  6. Audinate was off 13.76% to $8.59 on a negative outlook.
  7. Polynovo gave up 9.66% to $2.15.
  8. Viva Energy was down 6.23% to $2.71.
  9. Metcash slumped 10.64% to $3.19 on lower sales.
  10. Strike Energy was down 11.64% to $0.21.

What I liked

  1. This from AMP’s Shane Oliver: “While the near-term risk of a correction and more volatility is high, on a 6-12 month view though shares are still likely to trend higher on the back of the success in getting global inflation down, central bank rate cuts (with the RBA getting closer) and China ramping up policy stimulus.”
  2. Global central banks are cutting interest rates.
  3. Business conditions PMIs for October overall suggest global growth is okay and inflation still falling – consistent with ongoing “Goldilocks” (not too hot but not too cold) conditions.
  4. The US composite PMI remained strong in October, with output prices falling and at pre covid levels, consistent with more Fed rate cuts.
  5. US company earnings have been OK without shooting the lights out.
  6. While our PMI readings were weak, I liked the fact that that input prices fell sharply, which means costs to businesses are reducing and this should help bring the CPI down.

What I didn’t like

  1. Rising bond yields on lower rate cut expectations, especially for the Fed.
  2. This on rate cuts here: “Market expectations for just a 30% chance of a rate cut in December and 70% for February now look to have swung too pessimistic after being at 92% and more than 100% respectively in early September.” (Shane Oliver)
  3. The US market hanging on to big tech stocks and not buying elsewhere.
  4. Trump firming in the betting to win the US election but his tariffs are seen as inflationary, which could be another reason why bond yields are rising.
  5. The IMF report that said we might not see a rate cut until May! Fortunately, this ‘cuts’ forecasting is about as reliable as a tip from a jockey in the Melbourne Cup.

Good news to come?

This week we saw more rate cuts from China’s PBOC, with 0.25% cut to its one-year and 5-year loan prime rates. But the market wants to see the fiscal stimulus, which is expected to be announced soon at the National People’s Conference Standing Committee meeting.

Meanwhile, on Wednesday, we see the September quarter CPI. We need to see the core or underlying inflation number under 3% to make a big impact on the RBA.

Sad news

Regrettably, Percy Allen, who has been a contributor to The Switzer Report in the past, has passed away. He was a legendary public servant heading up the NSW Treasury and was a very intelligent and gracious great Australian. I’ll miss his commentary, which he sent me each week.  I always marvelled at his commitment to research and thinking objectively. I consider myself lucky to have known and liked Percy Allen, AM.

Here’s a great tribute to Percy in the AFR:

Leading financial reformer Percy Allan dies aged 78

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

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 

 

Quote of the Week

“This is from Westpac’s Luci Ellis: “We estimate the marginal propensity to consume (MPC) from the tax cuts at 0.16 – households are spending around 16% of the boost to their income and saving the other 84%… This will be welcomed by the RBA who’ve been alert to the upside risks to inflation from a lift in consumption.”

 

Chart of the Week

Could we get a surprise drop in inflation on Wednesday with September CPI due to be released? The chart below points to falling prices, so let’s hope it shows in the CPI.

 

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.