Despite some pretty good economic data for the US, Wall Street can’t get positive in any meaningful and sustainable way. This morning I have to report that both the S&P 500 and the Nasdaq have been in correction territory, meaning they’ve lost 10% or more since the high in July. Our high was in February and we’re hovering close to a correction, being down around 9.6%.
The slower-than-hoped fall in inflation and the relentless rises in interest rates have been a brake on stock prices.
However, it’s always dangerous to get too influenced by the prevailing short-term forces that determine share prices, unless they’re unequivocally saying the future looks shocking.
In fact, the opposite is being relayed to investors from many alternative sources.
Let’s start with data.
The Yanks saw GDP was up a big 4.9%, which should pretty well stop those selling stocks because of recession fears. But shouldn’t that rise spark fears of the Fed raising rates in November or December, which wouldn’t be good for stocks? Interestingly, the consensus view is that the Fed is ‘on hold’ at least until January and could be finished with rate rises. Of course, data will decide the issue, but that strong growth number also came with good inflation data.
The core personal consumption expenditure (PCE) reading for September came in up 0.3% and 3.7% for the year, which was what economists were predicting. As long as inflation-related data keeps trending down as it is, the market might stop selling tech stocks on interest rate concerns.
On the subject of tech, there’s been some mixed messages on this front, with Alphabet caned this week. It lost over 9% for the week, which meant other tech stocks copped it in the US and here. But Amazon reported well overnight and spiked over 7%. Before the close, the Nasdaq was in positive territory.
In fact, company reporting in the US has been better than expected, which should be a plus sign for the market. As of Thursday, some 50% of US S&P 500 companies had reported their September quarter earnings, with 79% coming in better than expected, which is above the norm of 76%.
These results and the high expectations that company earnings will be stronger next year makes the current sell-off even more head scratching. The extent of stock sales surprises others as well. “I think the idea that these dips are gonna be long and sustained is harder to argue for when there’s a lot of cash sitting on the sidelines,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, told CNBC on Friday. “I also think we’re setting ourselves up for a growth surprise next year, because if you look at the average analyst, they are forecasting the lowest sales growth and earnings growth over the next 5 years that we’ve seen in the history of our data.”
I think there’s excessive negative speculation, not helped by the war in the Middle East, Russia’s Ukraine war, bond yields that look crazily high and fears about what the Fed might do. All these concerns explain why there’s a lot of money on the sidelines, but is it smart money or scared money?
This excessive speculation has even been playing out in the oil market.
“The physical oil market is really a lot weaker than where the prices are predicting at the moment,” xxx told CNBC. “People have been exaggerating the oil market immediate implications of whatever might happen – it looks like nothing might happen on the immediate future that’s going to affect prices. The physical market is pointing in a different direction from the volatility but we’re still a good $10 below where the peaks were last month,” he added.
This has to be good news that should trump the negativity about how the Hamas-Israel war has to hit petrol prices, inflation, and economic activity. In a nutshell, reports of the market’s imminent demise look grossly exaggerated. More on this, I promise, on Monday.
To the local story, and Friday’s positive result for the S&P/ASX 200 (up 14.6 points to 6826.9) couldn’t offset the tough week we endured as stock players. The Index gave up 73.8 points (or 1.07%) for the week.
Here were the big weekly winners and losers, thanks to the AFR and Bloomberg
Megaport reported well but the anti-tech stance out of the US didn’t help. Meanwhile, Liontown suffered from the ghost of Gina Rinehart and a couple of analysts who downgraded the stock. Coles had a better week, up 1.8% following a good report from Woolies. Resmed, however, gave up 5% for the week and wasn’t helped by its report that higher costs in the quarter had squeezed the health tech’s margins tighter.
And Magellan Financial had a negative week, losing another 0.62% to finish at $6.37, but after the exit of its CEO David George, the stock spiked 2.4% on Friday. Meanwhile, Harvey Norman admitted that pre-tax profits had halved in July-September, showing interest rate rises are working but its share price rose on the news that HVN would buy back up to 10% of shares, or some $442 million.
What I liked
- Oil prices have fallen over the week, with the West Texas Intermediate (WTI) price of oil declining to US$83.36 a barrel on Thursday.
- The US economy expanded at an annualised rate of 4.9% over the quarter. This was the quickest pace since the December quarter 2021 and above the 4.5% growth rate the market was expecting. It’s bad for rate rises but at least it says the US isn’t heading for recession.
- The best bit about this strong growth number was the inflation news, with the closely watched core personal consumption expenditures (PCE) price index (which strips out food and energy costs) stepping down to a 2.4% pace in the September quarter. This was slightly below the 2.5% that the market was expecting and well below the 3.7% recorded in the previous quarter. That’s really good news.
- Both the services and manufacturing PMIs firmed in October, adding to evidence of further economic resilience. The Manufacturing PMI edged up to 50 in October from 49.8 in September. This was the first reading of 50 or above since April and just the second month this year the sector hasn’t been in contractionary territory.
- The European Central Bank (ECB) left interest rates unchanged for the first time in more than a year.
What I didn’t like
- The headline CPI rose by 1.2% in the September quarter (but the annual rate did dip to 5.4%). The RBA’s preferred measure of underlying inflation i.e., the trimmed mean, increased by a solid 1.2% and the annual rate stepped downto 5.2% from 5.9% in the second quarter. While it was an improvement, it wasn’t enough of one.
- Australia’s producer prices rose 1.8% in September, compared to the previous quarter and 3.8% over the past 12 months, which incidentally was a little lower.
- Export prices fell by 3.1% in the September quarter, while import prices rose by 0.8%, driven by petroleum products.
Is an end-of-year rally possible?
The possibility of an end-of-year rally will be the subject for my story on Monday but let me inform you, a lot of smart people aren’t ruling out a market rebound before year’s end. Watch this space! Let me assure you, I’ll be putting my money where my mouth is!
Let me finish with a memorable Mark Twain piece of advice: “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” I reckon Twain and Buffett would’ve got along well.
The Week in Review
Switzer TV
- Boom Doom Zoom: 26th October 2023 [1]
- SwitzerTV: 23rd October 2023 [2]
Switzer Report
- Two billing software providers set for faster growth [3]
- HOT stock: Treasury Wines (TWE) [4]
- Questions of the Week [5]
- At times like these, what would Warren Buffett do? [6]
- Here’s what to look for in bank reporting season. Who will star? Who could surprise? [7]
- HOT stock: Treasury Wines (TWE) [8]
- 3 quality stocks [9]
- Buy, Hold, Sell — What the Brokers Say [10]
Switzer Daily
- Will Albo’s next big idea be to tax the wealthy? [11]
- Get ready for a rate rise on Cup Day, but could there be more? [12]
- Hockey bags over-entitled politicians as a cancer [13]
- The human tragedy of Gaza and Israel brings economic pain [14]
- Big spending state governments keeping inflation high [15]
The Week Ahead
Top Stocks — how they fared.
Chart of the Week
One threat to stocks can be ruled out with the chart below showing that the US is not on track for a recession with economic growth coming in at a stronger than expected 4.9%.
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/Quote of the Week
I give it to St George’s chief economist Pat Bustamante, who told us the following about the latest US inflation reading, which the Fed especially monitors: “The closely watched core personal consumption expenditures (PCE) price index, which strips out food and energy costs, stepped down to a 2.4% pace in the September quarter. This was slightly below the 2.5% the market was expecting and well below the 3.7% recorded in the previous quarter.”
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.