Wall Street got itself caught in a dilemma where the professional players had to work out what was more valuable to them – a better-than-expected economy or an interest rate cut? To me, there’s no choice – a stronger economy producing more jobs than expected, which should improve company profits over time, is the better option. After all, the Fed would lower rates to achieve exactly that, wouldn’t it?

Showing you how deceptive an economy can be, the Yanks saw 224,000 jobs created in June, compared to a consensus guess by economists of 165,000. And this unexpected big number follow’s May’s astoundingly low 75,000 result. That was a huge turnaround!

And for those who have some excessive belief in the infallibility of the bond market, they had to witness bond yields rise and bank shares spike, which makes me ponder (as I did in Friday’s Switzer Daily): could the Oz economy surprise to the upside in the second-half knocking out the need for further rate cuts? I damn well hope so.

Not only did the S&P 500 Index hit an all-time high this week, the US cracked the longest period of economic growth in US history and unemployment is now 3.7%, which is the best reading since December 1969.

So what do we make of this number and the impact on stocks here in Australia? Erik Bregar, head of FX strategy at the Exchange Bank of Canada, sums up the reality of the weird world of making money out of stocks: “Markets never make it easy,” he told CNBC. We’ve had a rate-cut trade in place for a while now. That is, buy gold, buy bonds. But these things never go in a straight line. “If you look at bond markets around the world, they’re worried about something – I don’t think central banks have the guts to go against the bond market,” Bregar said.

I think the Fed is worried about Donald Trump and the US economy but if growth can lift without more rate cuts, then it could be a ripper for this bull market. Unbelievably, US money market experts have pencilled in a 100% chance of a rate cut this month and despite these job numbers, the Fed could still cut, given some weaker economic data away from the labour market.

Also, historically, job numbers have been a lagged indicator, so the Fed could easily cut once to save having to cut too many times. So that’s a new drama for coming months. The upcoming US company reporting season, with the outlook statements from major companies, especially on the impact of the trade war on bottom lines, is bound to be an important watch point.

To home and ironically the belief that lower interest rates are baked in have helped our S&P/ASX 200 Index creep ever closer to its all-time high of 6828, which hasn’t been seen since November 2007. The Index rose a big 132.5 points over the week (or 2%) to 6751.3 on Friday, meaning we need 77 more points to pull out our record high headlines.

It’s going to be interesting to see how market influencers react to the prospect of less US rate cuts because a potentially stronger US economy and global economy has implications for Australia’s economic growth. As I said, it all adds to a new drama for the months ahead.

It’ll also be interesting to see what this news does for bond proxy stocks, such as REITs and infrastructure plays such as Transurban, which surged last week by 3.9% to $15.32.

The likes of Goodman Group defied gravity to lift 6.9% to $16.07, while even Lendlease (one of my stocks on my list of potential big rebounders) rose 7.6% to $13.99. (We talked about this and other stocks on Monday’s Switzer Show).

Next week’s trade could easily support us going higher, with commodity prices still rising, partly explaining our dollar over 70 US cents. And the banks could drift higher in line with US banks, based on the possibility that the call on rate cuts here could also be overbaked.

On the banks over the week, ANZ lost 0.2% to close at $28.15, NAB put on 0.9% to $26.97, Commonwealth Bank 0.6% to $82.26 and Westpac was close to flat at $28.35. But the banks have had a nice run. The CBA is up 13% since the start of the year and NAB about 13% as well. Few would have predicted that with the Royal Commission and Bill Shorten on the horizon when 2019 kicked off. Let’s hope we can string a few more positive surprises for the rest of the year, with a Trump trade deal being at the top of my pre-Christmas wish list.

On that point, a part of this week’s market positivity came out of the G20 Summit last weekend, where President Trump offered trade concessions to the Chinese, including no new tariffs and an easing of restrictions on Huawei. Meanwhile, China agreed to make unspecified new purchases of US farm products. That was progress but let’s hope Donald and Xi don’t drag this out too long because stocks could easily drop, given the elevated levels we’re now seeing. We need to see reasons to believe in these new company valuations.

In Switzer Daily, I showed about 14 reasons to believe that our economy could surprise to the high side in the second half of 2019. The key word is “could” and I’ll list them in my “likes” section below.

If my outside guess/hope is proved wrong, we will see lower interest rates. And Westpac predicts the Aussie dollar at 66 US cents by 2020!

What I liked

(I’ll start with my list of 14 good news data drops mainly from last week.)

• Tax cuts are coming.
• We got another rate during the week.
• Retail sales rose 0.1% in May, despite the election.
• Sydney and Melbourne house prices rose for the first time in donkey years.
• The Services Purchasing Managers Index went to the highest level in six months.
• The CBA PMI for manufacturing rose and continues to expand.
• Building approvals rose 0.7% in May.
• The trade account hit a record surplus.
• The ANZ weekly consumer confidence rose 4%, the biggest increase in a year.
• The measure of economic conditions from the ANZ survey was the biggest rise in two years.
• New house sales in May rose 28.8% to the highest level since 2018.
• Our Federal Budget is now balanced.
• The share of foreigners owning Aussie shares is 31.3%, which is a 4-year high.
• And even the bad news of job vacancies falling 1.1% in the three months to May is coming off a record high and they’re still up for the year.

That’s the end of the local good “stuff”. Now for overseas:

• The Italian share market rose 1% to hit its highest level in almost a year, while its bank index soared 3.4%. Reuters reported that “Italy persuaded the European Commission that new measures submitted this week would help bring its growing debt in line with EU fiscal rules.”
• The ISM services index in the US eased from 56.9 to 55.1 in June (forecast 55.9) but any number over 50 means the huge employing sector is expanding.
•  The IBD/TIPP Economic Optimism index in the US rose from 53.2 to 56.6 in July and Autodata reported that US new vehicle sales were 17.28 million in June, above forecasts of 16.9 million. (These are annual numbers.)

What I didn’t like

• The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 52.7 points to 49.4 points in June – the lowest level since August 2016 but it was at odds with the better CBA reading on the sector.
• There was reduced investor enthusiasm on Wall Street to a trade deal being agreed between the US and China. The US Trade Representative has also proposed tariffs on US$4 billion worth of European Union goods in a long-running dispute over aircraft subsidies.
• The ISM Manufacturing Index in the US fell by 0.4 points to 2½-year lows of 51.7 points (forecast: 51 points) in June. Construction spending declined by 0.8% (forecast: flat) in May. The sector is still expanding but only just.

Reason to believe

Those tax cuts we got this week have been likened to the Rudd-GFC tax cuts, with those earning around $60,000 set to pocket $1,080. This is expected to translate into $8 billion worth of spending by a group of Aussies seen to be big spenders of their limited income. This stimulus comes at a time when the economic threat is a lot less than what prevailed during the GFC.

Tickets for the Switzer Listed Investment Conference in August are selling fast. A limited number of complimentary tickets are available for our valued subscribers, so click on the event you would like to attend below to get your tickets:

• Sydney, Friday 16th August
• Melbourne, Tuesday 20th August
• Brisbane, Wednesday 21st August

The week in review:

• Buried in data I was recently trawling was a list of the ASX Top 100 biggest losers for 2018-19. I thought it would be intriguing to see if the analysts/experts think these losers could become winners in 2019-20. The answer? A resounding “Yes” to 24 of them!
• I also looked at how to chase income in a falling interest rate environment in the Report this week.
• In the latest update of our model portfolios, Paul Rickard wrote that the model income portfolio has returned almost 20% in 2019.
• Chosen well, infrastructure should reliably produce higher single-digit returns over time. In his article this week, Tony Featherstone looked at 5 top global infrastructure funds for retail investors to consider.
• Price falls can serve to open up value for newer investors. From James Dunn this week, here are 3 such situations of contrarian plays from the resources lists – and another beaten-up miner, where the presence of a fully franked dividend adds to investors’ confidence.
• Our Hot Stock from CMC Markets’ Chief Market Strategist Michael McCarthy Treasury Wine Estates (TWE).
• In the first Buy, Hold, Sell – What the Brokers Say this week, FNArena registered no less than 13 upgrades in recommendations and 19 downgrades, while there were 4 upgrades and 6 downgrades in the second edition.
• In Questions of the Week, Paul Rickard answered readers queries about whether a yield of almost 10% fully franked is too good to be true, if you can put profit through a super fund and how the $1.6 million transfer balance cap would impact your spouse when you die.

Top Stocks – how they fared:

The Week Ahead:
Australia
Monday July 8 – Job advertisements (June)
Tuesday July 9 – NAB business survey (June)
Wednesday July 10 – Consumer confidence (July)
Wednesday July 10 – Building activity (March quarter)
Thursday July 11 – Lending (May)
Thursday July 11 – Speech by Reserve Bank official
Friday July 12 – Overseas Arrivals & Departures (May)
Friday July 12 – Credit & debit card lending (May)

Overseas
Monday July 8 – US Consumer credit (May)
Tuesday July 9 – US JOLTS job openings (May)
Tuesday July 9 – US NFIB business optimism (June)
Wednesday July 10 – US Federal Reserve chair testimony
Wednesday July 10 – China inflation (June)
Wednesday July 10 – US Minutes of Federal Reserve meeting
Thursday July 11 – US Consumer prices (June)
Thursday July 11 – China new vehicle sales (June)
Friday July 12 – US Producer prices (June)
Friday July 12 – China Exports & imports (June)

Food for thought: 

“More unwise investments are made in good times than in bad.” – Howard Marks

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 a new financial year underway, AMP Capital’s Shane Oliver put together a chart comparing the performance of major asset classes in 2018-19 compared to the five-year average:

Source: Thomson Reuters, AMP Capital

Top 5 most clicked:

• Switzer’s list of 24 losers tipped to be winners – Peter Switzer
• How do you chase income in a falling interest rate environment? – Peter Switzer
• 5 top infrastructure funds – Tony Featherstone
• Income portfolio up almost 20% – Paul Rickard
• 4 beaten-up resources bargains to consider – James Dunn

Recent Switzer Reports:

Monday 01 July: Losers on the comeback trail

Thursday 04 July: Chasing income as interest rates fall

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.