I get up early every morning expecting to see red on the screen of my iPhone. The Dow Jones seldom delivers but it did overnight, with the world’s most quoted stock market index off 327 points at its worst in early trade. But again, like many days trading in the Big Apple, the losses are pared back.
It’s a good thing that this happens and it makes perfect sense, provided the US economy keeps on the improve to support earnings of US companies, and the Coronavirus hasn’t been underestimated for its spread and impact on Chinese and then world economic growth.
You have to be careful of optimists of a US-kind as they can be very bullish on the future, until they’re not. And they can do bear market fear big time! Moderate, cool heads like Shane Oliver from AMP Capital have talked about the possibility of a 5% pullback for a US market that has been hot. I didn’t expect as big a start to the year and ahead of this, I’ve been telling our financial planning clients that we might go more defensive in March to April because the US election and last year’s big boom in stocks could set us up for a “sell in May and go away” year.
But if we don’t see a notable pullback soon I might do defensive earlier than I expected. That’s why headlines that the Coronavirus and the economy were the concerns that took the US market down overnight and set the key indices for the first losing week for three weeks.
The spread and death rate of COVID 19 are both not ramping up but it’s still a wait-and-see threat to stocks. The gold price is spiking and the yield curve is flattening, which can be the step before it goes negative. The recession calls always follow that development, so you can see why I’m not my usual positive self.
This assessment sums up our situation aptly. “Even if the outbreak recedes, global growth is still set to fall to zero in the first quarter, before bouncing back over the remainder of the year,” Peter Berezin, chief global strategist at BCA Research, said in a note. “Thus, a near-term hit to corporate earnings now looks unavoidable.” (CNBC)
China’s role in global growth is huge. Get your head around this revelation that the China Passenger Car Association this week told us that car sales dropped by a huge 92% in the first two weeks of February!
And to add to the concerns, the IHS Markit indicator for the services sector in the US plummeted to its lowest level in six years – and the Coronavirus was blamed. This says US services firms surveyed were feeling the effects of subdued demand from China because of the virus.
So that’s the state of play on Wall Street’s key driver – the US economy and the profits it helps generate. It makes sense that the key market indices were down about 1.3% for the week before the close because the effects of this infernal virus can not be underestimated.
On the plus side, Beijing is stepping up the stimulus and this is why many economists think a second-half economic rebound worldwide is in train. Gotta hope they’re right.
To the local story, where we are clearly more in the line of fire of the virus because of our economic relationship with China, we still saw a record high for the market mid-week. But we did cool our heels for a measly 8-point gain for the week on the S&P/ASX 200 to end at 7139.
S&P/ASX 200
Here are the notable stories of the week:
- CSL became our most valuable company – market cap-wise – but CBA snuck back later in the week. CSL was up 1.6% for the week to $336.40.
- AMP was up 12.88% for the week, with a Bell Potter analyst now rating the stock a “buy”, which will give its Chairman, David Murray, his best weekend in a long time.
- Coca-Cola Amatil reported an increase in sales and that hasn’t happened in seven years. This company used to be a good guide for the economy but with the backlash on sugar, I’m not so sure nowadays. The company’s boss, Alison Watkins, simply might be doing a better job!
- For those wondering why Coles lost 5.9% for the week after an OK profit result, you can blame the effects of bushfires, a Wesfarmers sell down of a third of its Coles stocks and an underpayments scandal.
- And tech stocks copped it. Wisetech lost about a third, pointing to the Coronavirus effects. EML Payments copped a regulatory snag and gave up 18.2%. The company actually reported well (I’ll follow this up on Monday’s TV show.) Altium was down 17.7% due to the virus.
What I liked
- Employment rose by 13,500 jobs in January – after increasing by 28,700 in December (previously estimated at 28,900). Full-time jobs rose by 46,200, but part-time jobs were down by 32,700. Economists had tipped an increase in total jobs of around 10,000.
- Over the past three months to January, job gains totalled 79,300, despite bushfires, smoke hazes and the coronavirus outbreak, which all have weighed on the economy.
- In seasonally-adjusted terms, average weekly ordinary time earnings (AWOTE) rose by 3.3% in the year to November – the fastest growth in 6½ years. The average annual wage is $86,237.
- In trend terms, the Internet Vacancy Index increased by 0.7% (or 1,100 jobs advertised) in January – the biggest gain in over two years.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2% to 109.1 points – the highest reading since mid-November. But sentiment remains below both the average of 114.1 points held since 2014 and the longer-term average of 113.1 points since 1990.
- Tourist arrivals rose by 0.9% in December but departures were flat. It was the biggest lift in tourist arrivals in four months. New Zealand tourists hit a record high of 129,100 in December but over the past year 1,453,200 tourists came to Australia from China, up by 0.9% on the year earlier – the weakest annual growth rate in 9½ years. China is the largest source of tourists to Australia and the January number will be a shocker!
- Building permits in the US rose by 9.2% to 1.551 million units (forecast: 2.1%) in January.
- The Philadelphia Fed manufacturing index rose by 19.7 points to 36.7 points (forecast: 11 points) in February.
- The Conference Board leading index in the US rose by 0.8% in January (forecast: 0.4%).
What I didn’t like
- Unemployment went from 5.1% to 5.3%. But in trend terms, taking out possible one-off things, the rate stayed at 5.2%.
- The wage price index rose by 0.5% in the December quarter (consensus: 0.5%). Annual wage growth was steady at 2.2% in the December quarter – the equal slowest annual growth rate since June 2018.
- According to the Commonwealth Bank (CommBank), “The monthly CBA Household Spending Intentions (HSI) series, data to end January, shows that the wide gap between consumer spending intentions and home buying intentions persisted into early 2020.”
- European share markets fell from record highs on Thursday, following disappointing earnings results.
Take care when thinking Tech and China
It’s interesting that tech stocks copped it this week when the ASX launched its first tech index – the S&P/ASX AllTech – and we learnt that not all tech stocks are equal. While Wisetech and Altium lost value because of the Coronavirus, the likes of Xero and Afterpay actually snuck up over the week. Their lack of Chinese exposure would explain that, reminding us that there’s always a lot to learn about how we invest.
Early in the week, Apple said that it would fall short of its recently announced quarterly sales target because of slower iPhone production and weaker demand in China, due to the coronavirus outbreak.
Over the past year we have been taking our financial planning clients out of emerging markets and swinging them toward the US. I thought it was a conservative but more reliable play. I’m glad we did that!
The week in review:
- I looked at how our top 10 stocks performed over the past year [1] to see if buying the dip would have been a good money-making play.
- Paul Rickard has been a bull on CSL for so long that “should I buy CSL at $330” is an easy question for him to dismiss. But this week he wanted to answer it [2] because no doubt many investors are asking themselves this very thing right now.
- SMSFs continue to hold cash levels around 30%. How will cash as an asset class perform over the next decade? Are we going to see SMSFs slowly acknowledge that cash remains the underperforming asset class and start putting a little to work? [3]
- Low interest rates and higher property prices are a help for bathroom and kitchen companies as Tony Featherstone wrote this week [4].
- On Monday, James Dunn looked at the companies announcing their numbers in the third week of reporting season [5].
- There were a large number of upgraded and downgrades in both the first edition [6] and the second edition [7] of Buy Hold Sell – What the Brokers Say this week.
- CMC Markets’ Chief Market Strategist, Michael McCarthy, put forward Beach Petroleum as the Hot Stock of the week [8].
- In Questions of the Week [9], Paul answered questions NAB’s new hybrid securities issue, whether CSL will do a share split and investing in corporate loans through the MCP Master Income Trust.
On our YouTube channel this week:
- Reporting Season on now, what stocks should you be buying? [10]
- We test out the doomsday merchant’s claim that the property prices must crash [11]
Top Stocks – how they fared:
The Week Ahead:
Australia
Tuesday February 25 – Weekly consumer confidence
Wednesday February 26 – Construction work (December quarter)
Thursday February 27 – Business investment (December quarter)
Thursday February 27 – Detailed labour data (January)
Friday February 28 – Private sector credit (January
Overseas
Tuesday February 25 – US S&P/Case Shiller home prices (Dec)
Tuesday February 25 – US Consumer confidence (February)
Tuesday February 25 – US Richmond Federal Reserve (February)
Wednesday February 26 – US New home sales (January)
Thursday February 27 – US Economic growth (December quarter)
Thursday February 27 – US Durable goods orders (January)
Friday February 28 – US Personal income (January)
Saturday February 29 – China Purchasing managers (February)
Food for thought:
“You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino, and everyone else is boozing. If you can stick with Pepsi, you should be okay.” – Warren Buffet
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:
As noted by Charlie Aitken in his article this week, 97.7% of developed equity market investment opportunities lie outside Australia:
Top 5 most clicked:
- Should I buy CSL at $330? [2] – Paul Rickard
- Buy, Hold, Sell – What the Brokers Say [6] – Rudi Filapek-Vandyck
- Is buying the dip a good money-making play with these top 10 stocks? [1] – Peter Switzer
- If SMSFs start lowering their cash allocation, where will it go? [3] – Charlie Aitken
- 3 home-renovation stocks with strong leverage to home-renovations trends [4] – Tony Featherstone
Recent Switzer Reports:
Monday 17 February: 10 stocks: buy the dips [12]
Thursday 20 February: Where will all this cash go? [13]
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.