Switzer on Saturday

Beware the I’s of May…

Founder and Publisher of the Switzer Report
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I hope I don’t have to warn about the three I’s of May because they’re certainly ruining our April brush with the stock market! They certainly came to bite our portfolios this week, with our market losing close to 3%, meaning the S&P/ASX 200 index is actually down 0.79% for the year to date.

Quite rightly, the US-based S&P 500 index is down over 3% this week because it’s the inflation challenges of the Yanks, along with Israel and Iran, that are the big contributors to the current sell-off of stocks.

Hopefully, these three I’s (inflation, Israel, and Iran) are a short-term threat to stocks, but we do need to see economic data KO inflation fears in the US. And we need this Iran-Israel war to settle down. History has shown that stock markets can live with wars — the S&P 500 was up 24% despite the ongoing Russia-Ukraine encounter, though it did get help from the enthusiasm for Artificial Intelligence.

Incidentally, the US market is up around 4.5% year-to-date but this could be cancelled out next week if Iran decides it’s not going to negotiate following Israel’s drone attack on Isfahan.

To Wall Street overnight and it was tech that took the S&P 500 up in 2023 and now it’s tech that’s taking it down. Overnight the Nasdaq lost 2%, while the Dow remained in positive territory. This is a classic risk-off play, driven by fears where quality assets are safe havens (big cap companies and gold) but if the three I’s become more seriously negative forces, then the Dow will dive as gold spikes.

Showing how worried stock players are, both the Nasdaq and S&P 500 are down six days in a row, which hasn’t happened for over a year. That said, Netflix actually reported showing better than expected results on the top line (or revenue) and also on the bottom line (or profit), but the stock lost 8%!

That’s the work of the headwinds of sticky inflation, meaning delayed or no rate cuts this year, meeting geopolitical concerns. This leads to profit-taking and short-selling on a grand but hopefully short-term scale.

Our portfolios are in the hands of US economic data drops. We see March quarter economic growth there on Thursday, while on Wednesday our own Consumer Price Index for the March quarter is released, which hopefully shows we’re continuing to beat down inflation.

I’ve always argued that 2024 could see our market play catch up with Wall Street so news this week that China’s economic recovery is picking up should eventually be a positive stimulus to our stock prices. Also, most of the world looking set to cut interest rates this year will be a plus for world economic growth, commodity prices and our stock market.

But we do need Israel and Iran not to make a bad war worse.

Right now, there’s no consensus on what might happen in the Middle East. This is what CNBC reported on Friday, close to the end of trading: “There was a relief sigh as investors realized Israel’s response was muted and designed to minimize escalation,” said George Ball, chairman of Sanders Morris. “Still, investors are very much on edge — macro market investors are much more aware of geopolitical risks today in their decision-making than they have been for a long time.”

We’re in a pullback period for stocks, and this has been tipped for some time, so it’s overdue in the US. Right now, we’re going along for the ride. Major worries of a geopolitical or global economic kind hit stock markets linked to commodities like ours and it shows in the currency, which is down temporarily because of these war worries that could hit and hurt world economic growth.

Our dollar went as low as 63.7 US cents yesterday but this morning it’s 64.16 US cents and our currency can be a barometer of fear.

To the local story and our market went to a three-month low, with the S&P/ASX 200 index down 220 points for the week to finish off 2.84% and ending at 7567.30. Not surprisingly, gold nearly went back to its record high of US$2,400 an ounce, while Brent Crude spiked above US$90 a barrel. These rises were reduced once it was learnt that Israel’s attack on Isfahan didn’t threaten Iran’s nuclear facility!

All this bad news for stocks has happened while bond yields have risen, which is good for keeping term deposits rates of interest elevated for the time being. Meanwhile, on Friday, it was interest rate-sensitive technology and real estate sectors that were worst hit, with the former sector down 1.6% and the latter off 1.5%. WiseTech lost 2.48% on Friday to $88.46, while Xero gave up 1.96% to finish the week at $116.81, which means it was down 2.66% over that time. Over the month, it has given up 11.64%!

Not surprising, energy stocks were up. Santos rose 1.8% to $7.83 as oil firmed, while the AFR reported that “…gold miners also advanced as the precious metal topped US$2400 an ounce during the trading session. Perseus Mining added 1.3 per cent to $2.30 and De Grey Mining climbed 1.1 per cent to $1.35”.

Ironically, “…the worst performer on the benchmark share index was Karoon Energy,” the AFR revealed. “It lost 5.4 per cent to $2.10 after downgrading guidance for oil production at its Brazilian tenements in financial 2024.”

What I liked

  1. The rise in unemployment from 3.7% to 3.8%, which is crucial to get the RBA to cut rates.
  2. Lithium prices are starting to rise. The AFR reported: “Pilbara Minerals chief executive Dale Henderson says the lithium market looks “very positive” after a price rallyover the past 60 days stoked hopes that a tough year for the sector might be over”.
  3. The IMF again revised up its global growth forecasts for 2024 to 3.2%, which is the same as 2023 turned out to be.
  4. US housing starts fell sharply in March and we need to see more signs of a slowdown there to see a change in attitude towards rate cuts.
  5. The Fed’s Beige Book of anecdotal evidence was “cautiously optimistic” on the outlook referring to “slight to moderate growth”, “moderate” wages growth and “modest” price increases. This should be consistent with lower inflation and no recession, which would be perfect for a comeback for stocks later in the year.
  6. Only 13% of S&P 500 companies have reported so far but 80% have beaten expectations, against a norm of 76% and earnings growth expectations have increased to 4.4% year-on-year from 4.1% a week ago.
  7. On an annual basis, Chinese March quarter economic growth was 5.3% and this was better than expected.

What I didn’t like

  1. The news that the rise in interest rates over the last two years has had a far more negative impact on Australian households rather than US households, with debt servicing taking up nearly 20% of household income here, compared to around 7.5% in the US.Why? Most Yanks are on 30-year fixed rate home loans and 11 interest rate rises in the States have had less bite!
  2. The Fed’s Jerome Powell telling us that US inflation data hasn’t provided the Fed with the greater confidence it wants, so it’s appropriate to leave rates high for longer.
  3. President Joe Biden largely maintaining the Trump era tariffs on China and has now called for a tripling of tariffs on certain Chinese steel and aluminium imports to the US (from 7.5% to 25%).This is electioneering.
  4. Monthly immigrant arrivals data was up in February suggesting that while immigration here may have peaked it remains around record levels.

You need good market news? Try this!

One of my favourite US economists is the famous Wharton professor at the University of Pennsylvania, Jeremy Siegel, who remains bullish on Federal Reserve’s rate-cutting path. “We can all say at the beginning of the year the market was way optimistic with four or five cuts. Now it’s squeezed down to one. And I actually think that we might get two or three cuts by the end of the year,” Siegel told CNBC.

Clearly, his reading of the economic tea leaves (i.e., the personal consumption expenditures data along with other statistics) is showing him what he calls “good trends”.

By the way, Siegel is an academic economist who understands Wall Street and has helped me with my big calls against negative market trends for at least two decades!

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  • SwitzerTV Investing:How will the Israel/Iran conflict affect stocks? Three stocks with potential upside: VUL, JLG & CXL.

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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 

Chart of the Week

Interest rate cuts need employment to fall and unemployment to rise and the chart above indicates that the leading indicator for jobs is heading down (green line) and the employment data (blue line) is following.

Quote of the Week

Despite the concerns about Israel and Iran, this is Shane Oliver’s latest take on investing this year: “Easing inflation pressures, central banks moving to cut rates and prospects for stronger growth in 2025 should make for good investment returns this year. However, with a high risk of recession, delays to rate cuts and significant geopolitical risks, the remainder of the year is likely to be a far rougher and more constrained than the first three months were.We expect the ASX 200 to return 9% this year and rise to around 7900. A recession is probably the main threat.”

 

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.