The strong run for stocks in 2021 took a breather this week, despite President elect Joe Biden announcing a doozy of a stimulus package with a bottom line figure of US$1.9 trillion. And for those wondering why this didn’t excite Wall Street, well, it looks like a case of the old market explanation of ‘buy the rumour, sell the fact’.
Called the American Rescue Plan, the big ticket items are the $1,400 payment to most Americans, the weekly unemployment payment goes up to $400 and the federal minimum wage goes to $15 an hour.
A second spending bill is tipped for February to address the big economic issues of creating jobs, reforming infrastructure, combating climate change and advancing racial equity.
Economists generally backed the spending, with the current infections, as well as death rates, ultimately slowing the economy. That means the strength of the stock market (which is up over 15% since the November election) is based on the expectation of this stimulus package and a quick rollout of vaccinations that will set the US economy up for strong second-half growth.
This is the economic take from the latest Wall Street Journal survey of top economists in the US: “Economists raised their growth prediction for 2021 U.S. gross domestic product in the January survey, saying vaccinations and the prospect of additional financial relief from Washington for individuals and businesses brightened economic prospects. The latest 2021 growth prediction [of 4.3%], measured from the fourth quarter of the prior year, was a sharp increase from the 3.7% growth forecast for 2021 in last month’s survey.”
In contrast, the RBA in August last year tipped we’d grow by 5% in 2021, though AMP Capital’s Shane Oliver in December was a little less bullish after some border challenges, and pulled our growth back to 4.5%. If either is right, our stronger economy relative to the US partly explains why Oliver thinks our stock market can outperform Wall Street in 2021.
On the latest count, 384,000 US citizens have lost their lives because of the Coronavirus, while the labour market was going negative, with 140,000 jobs lost in December and the first claims for unemployment insurance went to 965,000 in a week on Thursday, which is the worst reading since August.
This underlines how the Biden Administration has to vaccinate as many as possible as soon as possible to kickstart the economy to justify the stock market optimism Wall Street has been showing.
That said, with all the above, you can see it was time for a week of less enthusiasm for buying stocks. But I am writing this before the stock market closes and Americans and their willingness to buy shares never ceases to amaze even an optimist like yours truly.
Interestingly, earnings season kicked off this week with the big name financial institutions coming in with better-than-expected results. But they still sold off, which could affect our banks next week, as there’s often, inexplicably, a follow-the-US sector effect here.
That said, our success with beating the virus and the likely positive economic effects should cut our banks some slack. On the other hand, our bank share prices have really spiked hard ever since there was a rotation out of tech and stay-at-home stocks.
Back to US banks, and JPMorgan fell 1%, Wells Fargo 7.3% and Citigroup 4.5% on Friday ahead of the close.
To the local story and the S&P/ASX 200 Index lost 42.5 points (or 0.6%) over the week, to finish at 6715.4.
The stars this week were financials, energy and IT stocks. And then there was Afterpay, again!
The news for Afterpay was all good after its US equivalent, Affirm, with a smaller market share in the American market, debuted sensationally jumping 98% on its first day of trading. And helping APT go higher was Morgan Stanley raising the company’s target price from $120 to $136.
After a solid run up, Rio lost 2.8% to $120.52, while Fortescue gave up 0.6% to $25.18.
Here’s Bloomberg’s take on the big winners and losers:
Blue chip bargains emerged this week with CSL, down 4.6% to $267.26 and Transurban off 3.7% to $12.84.
Altium is still struggling with the pandemic’s hit on Silicon Valley, with a 9.7% slide to $28.22. The analysts think it’s more like a $34.22 company!
Happily my sticking to Woodside and the energy price has paid off, with the company’s share price up 7.9% this week. And the chart has looked good since November, as you can see below.
Woodside Petroleum (WPL)
And Paul Rickard’s and my support for the banks has been rewarding. Westpac was up 5.3% to $21.35, ANZ 3.4% to $24.66 and NAB put on 3.4% to $24.14. The CBA did nothing but it has had a pearler of a showing since early October. The gain has been 34% and the dividend is on the way up, helping SWTZ spike nicely.
What I liked
- Retail trade rose 7.1% in November, to be up 13.3% on the year.
- The National Skills Commission reported that preliminary skilled internet vacancies rose by 1.4% in November, to be up 11.1% on the year. Vacancies are at 17-month highs.
- Job vacancies rose by 23.4% (or 48,300) to a record high of 254,400 available positions in the three months to November. Vacancies are 12.1% higher in November than a year ago. And available positions are 27,100 (or 11.9%) higher than pre-pandemic levels in February 2020.
- According to the Reserve Bank, the value of credit and debit card purchases rose by 8% in November. Card purchases were up 8.7% on the year.
- Last week, the measure of whether it was a ‘good time to buy a major household item’ rose by 3.3% to 20.1 points – the highest level since 23 February 2020.
- According to the Commonwealth Bank (CBA), credit and debit card spending in the week to January 8 lifted by 13.1% on a year ago (previously: 14%). Spending on services rose by 1.5% from a year ago (previously: minus 4.1%). And the annual growth rate of goods spending climbed 24.4% (previously: 29.4%).
What I didn’t like
- The weekly ANZ-Roy Morgan consumer confidence rating fell by just 0.1% to 108.9 (long-run average since 1990 is 112.6). Sentiment has fallen for two consecutive weeks after hitting a 13-month high of 111.2 on 13 December 2020. But confidence is still up by 66.8% since hitting record lows of 65.3 on March 29 (the lowest reading since 1973).
- Engineering construction work done fell by 1.7% in real (inflation-adjusted) terms in the September quarter. But work done was still up 1.9% on a year ago.
- The US budget deficit widened from US$13.3 billion in December 2019 to US$143.6 billion in December 2020 (survey: minus US$143.5 billion).
- The NFIB small business optimism index fell from 101.4 to 95.9 in December (survey: 100.2).
- The UK FTSE index lost 1.1% after a top medical adviser said the pandemic’s worst weeks were imminent.
- The above coincides with the news that the UK is on the brink of a double dip recession after its economy shrank 2.6% in November, as Covid-19 cases spiked.
- Fears of a delay in further pandemic stimulus were heightened after House Democrats introduced an article of impeachment against US President Donald Trump.
Current rotation creates opportunities
There’s no evidence that stocks generally will fall out of favour but specifically some one-time tech market leaders and other market darlings are losing momentum. A few months ago I tipped ignored small caps would become targeted and as of this morning the Russell 2000, which is a small cap index, is up 30% in the past three months.
This has meant some good companies have lost friends as they were sold by fund managers to realise profits to get money to go into value stocks in particular.
For the long-term investor, this is creating buying opportunities, just like when we saw CBA at $63 in September. It’s now $85.38!
Unloved quality companies will make a comeback.
The week in review:
- I’m kicking off the year with a renewed commitment to 7 stocks that I’ve backed since early last year. Here’s why I’m stuck like glue to these non-blue chip babies [1].
- Paul Rickard put forward 5 strategies to reduce the impact on your investment portfolio of an appreciating currency [2].
- James Dunn looked at 3 listed situations where investors can get 7% plus effective yields [3], with reasonably acceptable levels of risk.
- Tony Featherstone suggested 3 ways you can play a global recovery in alcohol sales in the next two years [4].
- In the first Buy, Hold, Sell – What the Brokers Say of the week (and the year), there was just 1 upgrade and 3 downgrade [5], while there were 5 upgrades and 5 downgrades in the second [6].
- And in Questions of the Week [7], Paul Rickard answered your questions about Santos and Woodside, APN Industria REIT, Paygroup, and franking credits.
Our video of the week:
- Peter Switzer & Paul Rickard look at the stocks they like for 2021 [8] | Switzer TV: Investing
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday January 18 – Provisional overseas travel (December)
Tuesday January 19 – Weekly consumer sentiment (January 17)
Tuesday January 19 – CBA weekly card spending (January 15)
Tuesday January 19 – CBA Household Spending Intentions (December)
Tuesday January 19 – Weekly payroll jobs & wages (January 2)
Wednesday January 20 – Monthly consumer confidence index (January)
Wednesday January 20 – Building activity (September quarter)
Thursday January 21 – Labour force (December)
Friday January 22 – Preliminary retail trade (December)
Friday January 22 – Markit purchasing managers’ indexes (January)
Overseas
Monday January 18 – China Economic growth (December quarter)
Monday January 18 – China Retail/production/investment (Dec., annual)
Monday January 18 – US Financial markets closed
Wednesday January 20 – China 1-year & 5-year loan prime rates
Wednesday January 20 – US Presidential Inauguration Day
Wednesday January 20 – US NAHB housing market index (January)
Thursday January 21 – US Housing starts & building permits (December)
Thursday January 21 – US Philadelphia Fed manufacturing index (Jan.)
Friday January 22 – Markit purchasing managers’ indexes (January)
Friday January 22 – US Existing home sales (December)
Food for thought:
“Do not take yearly results too seriously. Instead, focus on four- or five-year averages.” – Benjamin Graham
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.
Chart of the week:
With the quarterly US earnings season kicking off, CommSec shared the following chart that shows how earnings per share growth expectations have changed over the last three years:
Top 5 most clicked:
- Sticking with these 7 stocks [1] – Peter Switzer
- 3 stocks with 7% plus effective yields [3] – James Dunn
- 3 alcohol stocks to lead the recovery [4] – Tony Featherstone
- How to play a rising Aussie dollar [2] – Paul Rickard
- Buy, Hold, Sell – What the Brokers Say [5] – Rudi Filapek-Vandyck
Recent Switzer Reports:
- Monday 11 January: Sticking with these 7 stocks [9]
- Thursday 14 January: 3 alcohol stocks to lead the recovery [10]
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.