Switzer on Saturday

Boris and Donald stand and deliver!

Founder and Publisher of the Switzer Report
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What was hoped for happened – a 60% trade deal is said to have been reached but signing won’t happen until January, the December 15 tariffs won’t go ahead on Sunday and BoJo joins ScoMo in the Prime Minister’s club! These are all pluses for stocks and President Donald Trump has told the press that negotiations on the other 40% of the trade deal would start immediately, which is another plus. He said it could’ve waited until after the election but I’m not sure how genuine he is on that.

Putting the important night for geopolitics in timely order, Boris Johnson has recorded the biggest Conservative Party election win since 1987. And when you look at our poll and the last US one, it becomes clear that people largely vote for personalities. (John Howard was an exception when he beat Paul Keating but Labor had been in office a long time.)

The Tories have a big 80 seat majority so his version of Brexit will be in train to proceed. “We will get Brexit done on time by the 31st of January, no ifs, no buts, no maybes,” the new PM said.

The FTSE Index rose 1.1% and both the German DAX and French CAC Indices saluted the result, underlining how the EU preferred the Conservatives as the government of the UK they wanted to get divorced from.

Back to the USA and stocks have not overreacted to the news that a trade deal is only waiting for a January inking. And while the reaction looks muted, it underlines how much the positivity on a trade deal was already baked into markets. Imagine the sell off if the trade deal was cancelled and tariffs rose on Sunday! It would have been madness on Monday on the local market.

This chart tells the story of 2019, where at this time last year, stocks were falling because the Fed was still tipped to raise interest rates and the China versus Trump on a trade deal wasn’t giving out good vibrations. However, pre-Christmas Day, the Fed boss Jerome Powell, started talking about “patience” on rates, which was code for ‘we could cut rates’ and Donald started saying progress on trade was happening and stocks started to rise, to be up 34% since that day!

Yep, positivity on rates and trade is well and truly baked in but it does set us up for another good year for stocks next year, though I’m not tipping a huge one. I did tip we could see the S&P/ASX 200 at 7000 and copped a few “you’ve gotta be kidding Switz” comebacks but I’ve gone awfully close at 6901.06 in early December and we still have half a month to go. And while we lose some holidays, a good old-fashioned Santa Claus rally could give me the gift I reckon I deserve, with the Index up 21% year-to-date before we throw in a year with good dividends.

Back to the trade deal and the text has been agreed to so some legal steps are necessary before a signing and the tariffs will be rolled back in phases. That said, the President pointed out that a 25% tariff on $250 billion worth of Chinese goods would remain.

All this led to a Trump tweet, which read: “We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more.”

And as an instant pay off, the Chinese will buy $US40 billion worth of agricultural goods.

To the local story on stocks and the combined pluses of the UK election and the positive trade deal talk lifted the S&P/ASX 200 Index by 32.7 points (or 0.49%) for the week to end at 6739.7 – it was a volatile week, as the chart below shows.

S&P/ASX 200

Source: au.finance.yahoo.com

Another positive force for stocks is the belief that China is poised to stimulate its economy and iron ore prices benefited.

The winners this week could point to which groups will do better next year, with materials up 3.26% for the week, energy up 2.17%, utilities up 1.31%, financials up 1.15% and consumer discretionary 0.31% higher.

Clearly, a trade deal that helps global and Aussie economic growth indirectly, even if it just helps confidence, should be good for banks and retail, as these two sectors are sensitive to the performance of the economy.

It was good to see that stocks we have mentioned positively in our despatches have benefited from the better trade and Brexit news. Link was up 5.6%, Bravura Solutions rose 6.6%, while Paul Rickard’s Tyro had a great first week. From listing on last Friday, it was up 34% and since Monday, it put on close to 7%.

I’d be surprised if the Brexit and trade deal news did not help our market next week but you can never rule out the old maxim of “buy the rumour, sell the fact.”

And in case you missed it, the US Federal Reserve Open Market Committee left the target range for the federal funds rate between 1.5% -1.75%. And while the Fed has cut rates at the three previous meetings, it left the message that it didn’t expect a change of rates in 2020!

What I liked

  • The CommSec Luxury Vehicle index has risen for the past five months, matching a similar lift in Australian home prices.
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.8% to 109 points. But sentiment is below both the average of 114.3 points held since 2014 and longer-term average of 113.1 points since 1990. The measure of whether it was a ‘good time to buy a major household item’ rose by 1.9% to 25.6 points – the highest level in seven weeks.
  • The Bureau of Statistics reports that Australian home prices rose by 2.4% – the biggest lift in over 2½ years – in the September quarter, to stand 3.7% lower over the year. The value of all dwellings in Australia in the September quarter was 0.1% higher than a year ago.
  • Chinese consumer prices rose by 4.5% (forecast: 4.3%) over the year to November – the strongest annual growth rate in seven years.
  • The NFIB business optimism gauge in the US rose from 102.4 to 104.7 in November (forecast 102.8).

What I didn’t like

  • The general run of economic data locally is too slow to improve and I’m hoping the Brexit and trade deal news will help turnaround local sentiment. I also hope the ScoMo Government doesn’t leave its fiscal stimulus to the May Budget because that might be too late.
  • The Westpac/Melbourne Institute survey of consumer sentiment index fell by 1.9% in December, after rising by 4.5% in November. The index stands at 95.1 points. Consumer sentiment is below the longer-term average of 101.5 points. A reading below 100 points denotes pessimism.
  • The NAB business confidence index fell from +2 points in October to +0.1 in November. The long-term average is +5.8 points. But the business conditions index rose from +4 points in October to 5-month highs of +4.2 points in November. The long-term average is also +5.8 points.
  • By value, credit and debit card purchases fell by 0.3% in October, to be up 6.1% on the year. Smoothed annual growth (12-month average) eased from 5.8% to 5.7%.
  • US retail sales rose 0.2% last month, which was less than expected. Economists polled by Reuters had forecast retail sales accelerating 0.5% in November, compared to November last year, where retail sales increased 3.3%.
  • New claims for unemployment insurance in the US rose by 49,000 in the past week to 252,000 (forecast 213,000)

One big dislike I’m watching

USA Today reported this on December 10: “Investor sentiment on the economy for the next 12 months dropped 14 points from a year ago to -7, its lowest level since 2006, according to Fidelity Investments’ annual Millionaire Outlook Confidence Index. That marked its lowest level since the index began that same year.”

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

 

The Week Ahead:

Australia

Monday December 16 – Mid-Year Economic & Fiscal Outlook
Monday December 16 – CBA ‘flash’ purchasing managers indexes (December)
Monday December 16 – Speech by Reserve Bank official
Tuesday December 17 – Reserve Bank Board minutes
Tuesday December 17 – Lending (October)
Wednesday December 18 – Skilled job vacancies (November)
Thursday December 19 – Population (June quarter)
Thursday December 19 – Employment/unemployment (November)
Thursday December 19 – Finance & Wealth (September quarter

Overseas

Monday December 16 – China production/investment/retail sales (November)
Monday December 16 – ‘Flash’ purchasing manager indexes (December)
Tuesday December 17 – US Housing starts (November)
Thursday December 19 – US Existing home sales (November)
Friday December 20 – US Economic growth (September)
Friday December 20 – US Personal income & spending (November)

Food for thought:

“Research your own experience. Absorb what is useful, reject what is useless, add what is essentially your own.”

– Bruce Lee

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:

This table published by Craig James of CommSec in the ‘Economic Six-Pack,’ December 13, 2019.

Top 5 most clicked:

Recent Switzer Reports:

Monday 09 December: 13 stocks to kick off the roaring twenties

Thursday 12 December: 3 stock market scenarios for 2020

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.