Switzer on Saturday

Could too much of a good thing trump this rally?

Founder and Publisher of the Switzer Report
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The stock market now looks becalmed, having set its ‘sails’ for the Trump tailwind since November 5. The enthusiasm, however, is starting to wane, with the Dow Jones and S&P 500 indices heading for a negative week, while the ‘super yacht’ Nasdaq is still managing to tack with a little positivity.

Jay Hatfield, CEO at Infrastructure Capital Advisors, summed it up for CNBC this way: “We’re kind of stuck in this trading range — the Nasdaq will outperform, small caps will underperform, [and the] Dow will underperform till we get some catalyst”.

Recent catalysts haven’t helped stocks, with this week’s Consumer Price Index (CPI) in the US a little too strong. The US economy is starting to look a tad healthier than it needs to be to ensure they get their expected rate cuts. Here’s the view of KPMG on the numbers: “The CPI data came in warm and mixed. The good news is that one of the primary drivers of inflation is abating; that is shelter costs. Core services appear to have cooled but are still running well above the pace last year and pre-pandemic. Debate over whether to cut rates a final time in December or take a breather will be heated. If the Fed cuts by a quarter point at its meeting next week, then it will do so while signalling a major pause at the start of the year”.

This followed the stronger-than-expected November jobs report in the US last week that showed 227,000 positions were created when economists expected 215,000. These big gains were helped by the ending of hurricanes and strikes that hurt the October numbers. Meanwhile, the rise in the jobless rate from 4.1% to 4.2% hosed down fears that the US economy was rebounding too hard to justify further rate cuts.

Not helping was the jump in the Producer Price Index (PPI), which was up 0.4% over November, making it 3% for the year, which doesn’t help the Fed cut rates again next week. And all these numbers were creating doubts and lower enthusiasm for buying stocks in the Big Apple this week.

I’ve talked about the possibility that a pullback wasn’t a totally stupid expectation, given US stocks are up 6% since Trump’s November 5 election win. The rise over the past 12 months is over 28%. Does this make thinking about a pullback crazy? If you throw in the fact that economic data drops aren’t following the script that makes it easy for the Fed to keep cutting rates, pullback thoughts don’t look silly.

AMP’s Shane Oliver put it altogether neatly with this: “Shares remain torn between the negatives of rich valuations, higher bond yields, uncertainties as to how much central banks will cut rates or in Australia’s case when the RBA will cut”.

He then added that there were “…uncertainties around Trump’s trade policies and geopolitical risks on the one hand versus the positives of global central banks being in an easing cycle, goldilocks economic conditions particularly in the US, optimism that Trump will reinvigorate the US economy and prospects for stronger profits ahead in Australia”.

All this is happening in the seasonally strong December quarter. By the way, while the month of December can be weak in the first half, it often powers up positively with a Santa Claus rally.

The data flow next week and what the Fed decides at its final rates meeting will be vital for stocks. And all the above explains why stocks are struggling with gravity right now.

Next week the Yanks get a big dumping of data (you can check this out in the table below) and that Fed meeting on Wednesday will be the big game changer for stocks, so hold your breath for that one.

To the local story, and it has been a loser week for the overall market as the winds out of Wall Street weren’t helpful. We had a shock spike in jobs along with a fall in the unemployment rate, which derailed talk of a possible February rate cut.

Our market needs to believe that a rate cut is close to help the rotation leg up, where miners and small caps get a lot more attention and the top 20 stock winners of the past couple of years lose ground.

That said, we did see miners such as BHP and Pilbara Minerals have a positive week, which was against the market trend. China’s bigger stimulus promises helped the materials sector.

Meanwhile, the S&P/ASX 200 fell 83.30 points (or 0.99%) over the week to finish at 8296, which partly explains why there were more notable losing stocks over the week.

Let’s now go to the stars and the strugglers for the stock market this week.

The Stars…

  1. Coronado Global Resources was up 7.10% to $0.88.
  2. Insignia Financial surged 17.97% to $3.61.
  3. Beach Energy was pumped up by 7.34% to $1.36.
  4. Paladin was powered up 6.28% to $7.95.
  5. Tabcorp proved to be a good bet, rising 6.82% to $0.60.

And the Strugglers…

  1. Audinate lost 8.63% to $7.31.
  2. Promedicus dropped 6.64% to $249.63.
  3. Perpetual gave up 8.64% to $19.99.
  4. HUB 24 slipped 7.64% to $70.82.
  5. Domino’s was off 7.77% to $29.45.
  6. Downer EDI was on a downer, dropping 5.95% to $5.45
  7. Ventia Services was up and down, but in the end lost 13.07% to $3.69.

What I liked

  1. The RBA’s more dovish tone after its ‘no rate change’ this week, which led some economists and the market increasing their expectations about a February rate cut. However, the drop in the jobless rate on Thursday changed those hopes.
  2. The November NAB business survey showed falls in business conditions and confidence, with conditions at their weakest since the pandemic. (This bad number could help the RBA look past that surprising jobs number here on Thursday.)
  3. The NAB business survey also showed a further easing trend in cost and price pressures. Final product price growth is running at 0.6% on a quarter-to-quarter basis, which is 2.4% annualised. This is consistent with the RBA’s 2.5% inflation target.
  4. The Bank of Canada, the ECB and Swiss National Bank cut rates again in the past week.
  5. More China stimulus talk which helped our miners’ share prices.
  6. US small business optimism surged in November on the back of optimism that Trump will boost the US economy. (This is good for ‘no recession’ in the US, but it might be bad for inflation.)

What I didn’t like

  1. Our jobless rate falling from 4.1% to 3.9% when a rise was more on the cards.
  2. Too many jobs created in November i.e. 35,600, which is making a few economists start to doubt the ABS’s figuring.
  3. Core CPI inflation in the US has been stuck around 3.3% year-on-year for several months now.

A memorable Boom! Doom! Zoom! at noon…

Our final BDZ was consistent with the silly season and became a bit of a laughable experience after I tried to do the show in my car via my iPhone! Why? I had a day on the harbour that kicked off at 12.30 and BDZ ends then. So, the timing was perfect.

All was going along well. I got a nearby parking spot near the Rose Bay jetty on Sydney Harbour, but the traffic was so loud I had to close the windows. And that created a sauna in the car! Then my iPhone closed down because it complained that it was too hot!

Only in the silly season! Happily, Mike Gable from Fairmont Equities kept his cool and helped keep the show on the road.

It was not only an informative BDZ but a lightly amusing one! And it’s always good to end with a laugh…

Switzer This Week

Switzer Investing TV

Switzer Report

Switzer Daily

The Week Ahead

 

Top Stocks — how they fared

 

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 

 

Quote of the Week

AMP’s Shane Oliver on the surprise drop in unemployment in a struggling economy:

“Surprisingly strong jobs data for November – but is it for real? November jobs data was far stronger than expected with employment up by 35,600 and unemployment back below 4% to 3.9% and labour market underutilisation rolling over again all suggesting the jobs market is tightening again.”

 

Chart of the Week

Maybe the ABS jobs data needs to be tested for accuracy?

Here’s another view on the above from Shane Oliver: “Maybe it’s due to ongoing strength in public sector employment and labour hoarding or maybe there’s a bit of statistical noise in there with the ABS noting “a higher than usual number of people moving into employment who were unemployed or waiting to start work”, which could reverse next month. Whatever, it is we are a bit sceptical and continue to expect softer jobs growth and higher unemployment ahead.”

 

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.