Another nice finish for US stock markets eventuated with the FANG (Facebook, Amazon, Netflix, Google) stocks back in favour, which says something positive about investors’ attitudes to the rally. At the beginning of the year, the word on Wall Street was “expect a rotation out of growth stocks into value” but earnings and the unfolding economic story both support growth stocks.
By the way, the Dow Jones is on its seventh day of rises, while the S&P 500 put in the best week in two months and this happened as earnings delivered, China trade talk became less heated, geopolitical news became less scary and US inflation said not to expect a bond market rout or a silly Fed raising rates too fast.
This also weakened the US dollar, which has been a headwind for Wall Street but it now means our currency is trading at 75.47 US cents. On Wednesday, it went as low as 74.17 US cents! That took a bit of wind out of our sales later in the week.
Not many people know this but tech plus financials make up nearly 35% of the S&P 500, so what happens to these two sectors is really important. And this week Warren Buffett doubled his bets on Apple, so there’s a bit of the Oracle of Omaha in this surge in tech stocks this week.
By the way, if our banks weren’t being put on trial for crimes and misdemeanors, they might have benefited from the current worldwide stock market support for banks. Oh well.
Back to the US market and technical info has been comforting, with both the Dow and S&P 500 closing above their 50-day moving averages.
“Tough just yet to think the market is completely out of the woods, but it’s been right to be bullish and until trends reverse …, this will still be the case,” said Mark Newton, managing member at Newton Advisors in the US. “We’ve seen constructive trend breakouts in the SPX and in [Dow] yesterday, while Nasdaq got over April highs and seems to have a bit more to go higher.” (CNBC)
Local stocks have shown a real desire to head higher but there has been little help from financial stocks, with AMP having a terrible week, despite the arrival of David Murray as the new chairman to clean up the company. There are foreboding predictions about the company, with suggestions that financial planners and even groups within the iconic Aussie company could simply walk away.
AMP’s share price was off 10% for the week and since the Royal Commission, the stock’s price has gone from $5.47 to $3.73 on Friday. That’s a 31.8% slump – unbelievable!
Despite the negative headwinds from the financial sector ‘inquisition’, the market sneaked up 0.9% to finish at 6116.2. However, we just don’t seem to have that momentum to really take out the decade highs, which were in our sights this week.
One possibility for the small negative for the Index on Friday was the rise in the Oz dollar back into the 75 cents region, with a low US inflation reading creating fewer concerns about interest rates rising too quickly this year. The 10-year bond yield in the US really pulled back from the 3% levels that have been spooking stock markets recently.
One bright spot was the energy sector, with the oil price heading higher on President Trump’s bouncing of Iran and his withdrawal from the Iran nuclear deal. But this could be a sign of things to come, with numerous analysts predicting oil prices could climb over $100 a barrel!
Meanwhile, the AFR on Friday was warning that the current rally has some serious doubters and you can’t ignore the fact that this is that despised month of May, which has been bad for stocks in the past. However for the last five years, the old “sell in May and go away” hasn’t worked like it did in the old days before the GFC.
A London-based firm called Absolute Strategy Research is recommending that selling into rallies could be a smart play. They’re doubting China’s economic growth potential and see the Oz dollar slipping to 66 US cents. They also think bond rates will rise quicker than expected.
I’m not convinced about these negative views on China at the moment.
This comes as Schroders’ Aussie equity team argues that our industrials – especially the stellar performers such as Kidman Resources, A2 Milk and Bellamy’s have lost touch with realistic valuations.
Interestingly, they see merit in my contrarian view, which is supported by my colleague, Paul Rickard, that financials are over-beaten up, though they can’t find anything positive to say about poor old AMP.
What I liked
- The generally positive reaction to the Budget and the shrinking of the Budget Deficit at a better than expected rate.
- The NAB business conditions index rose to a record high +21.1 points in April, up from an upwardly-revised +15.4 points in March (previously +14.1 points). The business confidence index rose to +10.1 points in April from an upwardly-revised 8.0 points in March (previously +7.4 points).
- The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.3% to a 13-week high of 119.6. Confidence is up by 9.3% over the year and above the average of 113.6 since 2014.
- ANZ Job Advertisements fell by 0.2% in April after declining by a downwardly-revised 0.1% (previously: flat) in March. However they’re still up 8.6% on a year ago.
- The Australian Industry Group Performance of Construction index fell by 1.8 points to 55.4 in April but any reading above 50 signifies expansion or growth of activity. The index has expanded for 15 consecutive months.
- CommSec’s Craig James’ view on Chinese data this week: “The bottom line is that the Chinese economy is healthy with firm activity levels and sustainable inflation. While costs for businesses are growing at a faster pace above 3%, it will be just a watching brief for policymakers.”
- The US March quarter earnings reporting season is now 90% done, with 76% beating on profits, 73% beating on sales and earnings up 24% on a year ago.
- In April, China’s exports were up by 12.9% over the year (forecast +6.3%), with imports up 21.5% (forecast +16%). The trade surplus stood at US$28.78 billion in April (forecast US$24.7 billion).
- US consumer prices rose by 0.2% in April (forecast +0.3%) to stand 2.5% higher than a year ago. This hosed down fears that inflation is about to spike and it also reduced the spook factor in the bond market.
- In the US, the JOLTS series indicated that the number of job openings rose from 6.078 million to 6.55 million in March (forecast 6.101 million) and the NFIB Small Business Optimism Index rose from 104.7 to 104.8 in April (forecast 105.2).
- The Trump meeting with Kim Jong-un has to be seen as a positive for markets. I hope those two excitable boys don’t get on each others’ nerves.
What I didn’t like
- Citi economists now have the first rate hike happening towards the end of 2019. If they’re right, the RBA’s and Treasury’s growth guesses for 2018-19 are too optimistic.
- Retail trade was flat in March, after rising by 0.6% in February and rising 0.2% in January. Annual spending growth rose from 3.0% to 3.1%.
- The Bank of England cut its second quarter growth number from 1.8% to 1.4% and the Poms can thank Brexit for this problem!
- The number of loans (commitments) by home owners (owner-occupiers) fell by 2.2% in March – the sixth fall in seven months. Loans are down by 3.5% on the year but it’s not all bad news, with the value of loans in trend terms to budding home owners hitting a record high of $21.23 billion in March. Victorian and Tasmanian loans are at record highs.
- President Trump announced that the United States will exit from the 2015 Iran nuclear deal that was agreed by other major western nations. The US would now impose the “highest level” of sanctions on Iran, so we have another Trump curve ball. Wall Street seems to be relaxed about the news but who knows with Donald?
My revised view on Donald
This guy has certainly hurt our stock market’s progress this year but he does have a happy knack of pulling victory out of the jaws of defeat, so a one-time despised enemy becomes, as in the case of China’s leader, Xi Jinping, a “friend”. Only this week, the President tweeted: “I will be speaking to my friend, President Xi of China, this morning at 8:30. The primary topics will be Trade, where good things will happen…”
There is certainly method in his madness. Maybe time will show us that in this mad, mad world we live in, being a sensible, logical and sincere international leader doesn’t work! As George Bernard Shaw once observed: “The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.”
Maybe that’s Malcolm’s problem.
The Week in Review:
- Don’t ever forget that if you’re investing for the long-term, you have to look past the short-term hubris. This is the safest contrarian risky play on stocks you can invest in! [1] And I take a look.
- The market surged in April and Paul Rickard updated our model portfolios. Take a look to see where the market is sitting now. [2]
- US earnings season gets an A+ [3] and the biggest equity market in the world has more than passed the Q1 earnings test. Find out from Charlie Aitken.
- Tony Featherstone shared 7 tips for picking the good boards from the bad [4].
- And James Dunn looked at 5 local companies to benefit from US dollar strength [5]. A resurgent US dollar, means a weaker Australian dollar, but that is good news for those companies earning a lot of income offshore.
- The EOFY is not far away and Graeme Colley looked at what’s new with tax deductions for super contributions [6]. I say get cracking now if you don’t want to get over taxed!
- There was plenty of good news for young and old superannuants in the Federal Budget and Penny Pryor [7] took a closer look.
- In the first Buy, Hold, Sell – What the brokers say [8] Nine Entertainment and Woolworths were upgraded.
- And in the second Buy, Hold, Sell – What the brokers say [9], Investment managers did well with three upgrades for Platinum and one each for Challenger and Macquarie.
- HUB2 was this week’s company featured in Professional’s Pick [10] and Manny Pohl from ECP Asset Management explained why.
- Origin and Rio are our stock picker’s preferences today while AMP is not looking good on the charts. Read more in our Hot Stocks. [11]
- Plus, all of your Questions of the Week [12] are answered. Don’t miss reading advice from our experts!
Top Stocks – how they fared:
What moved the market?
- President Trump decided to re-instate sanctions on Iran, which led to new highs for the oil price.
- The Federal Budget was generally well received. Some stocks were impacted. Link was a loser while Challenger was a winner.
- A disappointing third quarter trading upgrade from the CBA
Calls of the week:
- James Dunn named 5 companies that will benefit from the US dollar strength.
- David Goodall, the scientist who travelled to Switzerland to be euthanised asked “Why is this taking so long” moments before he peacefully passed away.
- Donald Trump made a call to pull out of the Iran deal.
The Week Ahead:
Australia
- Monday May 14 – Credit & debit card lending (March)
- Tuesday May 15 – Reserve Bank Board minutes (May)
- Tuesday May 15 – Lending finance (March)
- Tuesday May 15 – Tourist arrivals/departures (March)
- Tuesday May 15 – Reserve Bank speaker
- Wednesday May 16 – Wage Price Index (March Quarter)
- Wednesday May 16 – Monthly consumer confidence (April)
- Thursday May 17 – Employment/Unemployment (April)
- Friday May 18 – CommBank Business Sales Indicator (April)
Overseas
- Tuesday May 15 – China activity data (April)
- Tuesday May 15 – US Retail sales (April)
- Tuesday May 15 – US Empire State manufacturing (May)
- Tuesday May 15 – US NAHB housing market index (May)
- Wednesday May 16 – China House prices (April)
- Wednesday May 16 – US Housing starts (April)
- Wednesday May 16 – US Building permits (April)
- Wednesday May 16 – US Industrial production (April)
- Thursday May 17 – US Philadelphia Federal Reserve survey (May)
- Friday May 18 – US Conference Board Leading Index (April)
Food for thought:
“Great things in business are never done by one person. They’re done by a team of people”. Steve Jobs
(Answer to last week’s riddle was $1.05. And no, the ball was not tampered with!)
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.
Photo of the week:
ScoMo is back in black!
Source: The Daily Telegraph
Chart of the week:
ScoMo gets us there a year earlier!
Source: Business Insider
Top 5 most clicked:
- This is the safest contrarian risky play on stocks you can invest in! [1] – Peter Switzer
- 5 local companies to benefit from US dollar strength [5] – James Dunn
- Buy, Hold, Sell – what the brokers say [8] – Rudi Filapek-Vandyck
- What was in the Federal Budget for super? [7] – Penny Pryor
- US earnings season gets an A+ [3] – Charlie Aitken
Recent Switzer Super Reports:
Thursday 10th May: A plus [13]
Monday 7th May: S [14]afe [14] as banks [14]
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.