Switzer on Saturday

A sell-off is likely but it will be a buying opportunity

Founder and Publisher of the Switzer Report
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When Fed boss Jerome Powell took the stage at the central bank conference at Jackson Hole, Wyoming overnight, he didn’t let stock players down. And Wall Street loved what they heard. All four closely watched indexes (the Dow, the S&P 500, the Nasdaq and the Russell 2000) surged higher but the latter took the cake with a gain close to 3%.

As I’ve been telling you, lower interest rates favour smaller cap companies that have been punished for being small, being interest-rate dependent and having rate sensitive customers. Like the small businesses they deal with, those customers have been carrying debt. As rates surged higher after the covid lockdowns ended, they’ve been under pressure.

Given the above, Powell’s message was that “… the time has come for policy” and then effectively said that interest rate cuts would be dependent on “the incoming data, the outlook and the balance of risks”.

Clearly, the Fed wants to fight recession talk and wind up with a soft landing. Powell’s overall message was interpreted by the money market forecasters to suggest that the probability of a 0.5% cut in September has gone from 27% to 37%, while a November 0.5% cut has lifted from 57% to 75%.  (A big cut of 0.5% wouldn’t happen in two successive months, so it would be an either/or possible outcome.)

If a 0.5% cut materializes in coming months and the recession threats are dissipating, it would set the scene for another sustained rise, especially for stocks that haven’t enjoyed the huge run up that big tech and AI-benefitting companies have, as well as those such as our banks and our standout retailers like JB Hi-Fi and Wesfarmers.

The news saw the greenback slide and the Oz dollar rose to 67.95, bond yields fell and the SPI Futures for our stock market open on Monday says we’ll start 44 points higher.

What happens next to stocks should overall be positive over time. From my current position, I want to be very long stocks, maybe until this time next year, when I could go more defensive with big gaining stocks. That said, the Fed and stock market influencers will watch labour market data and the inflation reads to work out how many cuts are needed and these readings will determine the volatility for share prices.

I don’t expect months of stock price climbing — there will be volatility — but I want to ride the overall trend higher for company valuations, especially for those who’ll have better bottom lines from lower interest rates. Of course, we need to see better economic data here to force our RBA to start cutting but there is a slowly growing pile-on of economists thinking a rate cut by year’s end is becoming more possible.

We need to see slowing economic data and inflation continuing to slide, before RBA boss Michele Bullock backs off on her tough talk about cuts and starts sounding like the triumphant Jerome Powell, who I reckon would’ve loved to do a George W. Bush and declare “Mission Complete!”

Of course, there was a certain irony with that, given the war that followed, but it is a nice way to sum up achieving a difficult goal, which the Fed looks like it has pulled off. Obviously, time and the course of the US economy will be the final decider on how good Powell and his central bankers were in beating inflation and avoiding a recession.

This note from UBS shows that experts think rate cuts will be quite extensive: “The outlook for Fed rate cuts has shifted, with a more mixed set of labor data showing the Fed now has both the imperative and the leeway to cut interest rates.” And thankfully the note declared that recession fears were “overdone”.

The upcoming tests for Wall Street’s support for stocks will be next Friday’s Core PCE reading, which is the Fed’s favourite inflation indicator and the August jobs report on the following Friday September 6.

If these numbers say inflation continues to fall and the job story doesn’t point to recession concerns being rational, then stocks should stick to the uptrend. On the other hand, if the jobs report isn’t positive, the odds of a 50-basis point cut will shorten at the September FOMC meeting and stocks could get a jolt down on recession fears. The drama around data continues.

To the local story and until Friday we had racked up 10 straight days of gains for the overall market, but the 3-point fall couldn’t stop the S&P/ASX 200 finishing in the green, up 52.8 points (or 0.66%) to 8023.90.

Friday’s stellar performer was Fischer & Paykel, which has been advocated on my TV show by Jason Teh, fund manager of the Switzer Dividend Growth Fund. The Kiwi healthcare stock spiked 11.9% to $32.83 after upgrading its profit guidance.

Interestingly, Guzman Y Gomez was up 3.5% to a record high of $34.71, ahead of reporting next week. Does someone know something we don’t know? Meanwhile, Inghams had a foul report, off 20.1% to $3.09 after a negative outlook revelation.

Let’s have a quick look at the stocks that starred and faltered in another reporting week.

The stars

  1. Wisetech: on a 28% jump in revenue, the share price rose 30.15% for the week.
  2. Brambles put on 15.12% on better sales.
  3. Super Retail Group rose 5.11% on good showing from Rebel and Supercheap Auto.
  4. The two big miners had a good week gaining around 1% but the third miner, FMG, was up 5.7% for the week
  5. Kathmandu and Rip Curl owner KMD Brands rose over 18% on good reporting.
  6. Baby Bunting jumped 8.9% on Tuesday after a better-than-expected report.

The falterers

  1. Star dud A2Milk lost 18.7% on Monday on a bad outlook but, wait for it, was up nearly 6% for the week!
  2. Megaport lost 18.1% on a report that disappointed.
  3. Medibank dropped 0.12%, despite a 14% rise in net profit.
  4. Collins Foods lost 14.85% on the news of higher costs.
  5. Santos went down on a bad report losing 4.39% for the week.
  6. Domino’s Pizza continues to struggle with a fall of 5.83% despite Don Meij being replaced by his sister Kerri Hayman as Australian CEO!
  7. Dexus didn’t deliver positive news and fell 6.6% for the week.

What I liked

  1. The CBA, Westpac and the bond market telling the RBA that it will be proved wrong on interest rates and that a cut will be needed by year’s end. (While I don’t know if they’re right, I do like the willingness to debate the subject!)
  2. The rising $A that helps cool inflation.
  3. Minutes of the July Fed meeting revealed that the “vast majority” of FOMC participants thought “it would likely be appropriate to ease policy at the next meeting”.
  4. The PMI services readings for US and UK were all better than expected. Europe’s was too but the Olympics helped and is temporary.
  5. Growth in the major advanced economies bounced back in the second quarter. GDP growth was stronger in Japan and the US, and broadly unchanged in Western Europe.
  6. Bloomberg reports that China may let local governments issue special bonds to fund purchases of unsold homes clogging the market.
  7. On the local reporting season so far, this is what AMP’s Diana Mousina has summed up: “Around 65% of Australian ASX200 listed companies have reported June half-yearly earnings. The results have mostly been okay. 36% of results have beaten expectations, slightly below the usual 40% (results tend to beat expectations because companies downgrade analyst expectations before the results!). There have been less results disappointing expectations, with 32% of results below expectations from its average of 41%”.

What I didn’t like

  1. The run of economic data that’s not making it easy for the RBA to contemplate a rate cut.
  2. The US Conference Board leading index fell again in July, down by 0.6% and is lower compared to a year ago. Usually, when the Leading Index has been continually below its levels from a year ago, it has lined up with a US recession.
  3. The iron ore price at just under $90 a tonne, which is down from over $100 a tonne at the beginning of July, so it has been a decent decline that’s mostly due to concern around the Chinese economy.
  4. Australia’s Westpac Leading Index is telling us that economic growth will be soft in Australia in the near term.

The two curve balls ahead

Interest rate cuts and the US election are two curve balls that could help or hurt the stock market. Ahead of Jackson Hole last night, some were saying that a rate cut is built in, so there could be a sell-off when rates fall. Also, a 0.25% cut might be seen as too small, while a 0.5% cut could be seen as the Fed fearing a recession! And then there’s the Trump-versus-Harris poll in the first week in November and who knows how the market could react to a Trump win as he comes with a sack of curve balls! Yesterday he said all the soldiers who left the forces because of Biden/Harris policies will be welcomed back with backpay for what they lost in leaving the army and that stands even if they’ve worked the whole time! Who has worked out the budget hit on that?

This is Betfair’s view on the election after President Obama spoke at the Democratic Convention: “Just hours before Barack Obama’s speech Donald Trump retook the lead in the race to the White House on the Betfair Exchange. Overnight that lead widened, and he is now the odds-on favourite at 1.99, that’s despite more bets coming in for Kamala Harris in the past 24 hours”.

I suspect the market will find a Harris win easier to trade, while Donald comes with lots of question marks.

 

Switzer This Week

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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

Following the RBA’s minutes being released from the August board meeting, I liked this from the CBA economics team: “Our base case sees both inflation moderating more quickly than the RBA’s central scenario and unemployment stepping up a little faster, which is why we stick with our call for the RBA to commence an easing cycle in Q4 24.”

 

Chart of the Week

This ETF excludes the top 20 stocks and buys the other 180 and is an indicator of rotation to other stocks. EX20 is up 3.14% in the past month while the S&P/ASX 200 is up 0.56%.


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.