Deal on! It’s a partial deal at this stage. By the closing bell on Wall Street, the Dow was up 319.92 points (or 1.21%) but it was up over 500 points at one stage, so the market is happy though it wants something more conclusive.

All this was a consequence of a key meeting between the President himself and China’s Vice-Premier, Liu He and we knew that what would be said and tweeted after the meeting would determine what would happen to stocks in the closing hour of the US stock market and of course, here on Monday and beyond.

It was a week that started with nervousness, with Bloomberg reporting that Chinese officials were growing hesitant to agree on a broad trade deal pursued by US President Trump. Against that there were upbeat comments on Monday from White House economic adviser Larry Kudlow about the possibility of some good trade talk news but these failed to calm investor nerves.

Monday on Wall Street wasn’t good for stocks. However, as the week progressed, positive hints helped the S&P500 climb the wall of less worry as the chart above shows.

By mid-week, expected progress with the trade talks were dashed by a report that the US Commerce Department will add 28 Chinese companies to a US trade blacklist. The White House then announced visa restrictions on some Chinese officials and China’s foreign ministry said to “stay tuned” for retaliation.

Meanwhile, by Thursday, one report said a key Chinese official was going home early but on the same day positive views on trade talks kept stocks sneaking higher.

Undoubtedly, I’ve had Friday on my mind all week, as I knew that a trade truce/deal possibility was going to be the basis for the next leg up for stocks, which has been a case I’ve argued or prosecuted (as they say nowadays) for quite some time.

And I believe the later Donald Trump leaves a complete trade deal, the more likely he and his trade war, which has China as an accessory, will contribute to a possible global recession and a big stock market sell off that could evolve into a crash!

So we have progress. At the time of writing and after the closing bell, reporters at the White House were saying that President Trump was quoted as saying: “very close to ending the trade deal”. He also said “I don’t think it should be a problem to have the deal papered.”

There were also reports that there would be no increases in tariffs to 30% and undoubtedly more details will be released later today. We live in hope.

On the local front, the poor business and consumer confidence readings were a disappointment but beneath the surface, the overall readings aren’t as bad as you might think and the chart below shows that.

Of course, trade talks positivity was our biggest driver but local economic news was no brake on the 89-point (or 1.4%) gain over the week, with the S&P/ASX 200 finishing on Friday at 6606.8.

This was better than week one of October, with the market losing $57.3 billion. And given our slow progress on the economic improvement front, our market is in the hands of the Trump trade deal details and what emerged out of these Friday arvo negotiations in the US.

Friday gave us an insight into what a trade deal could deliver for our stock market.

This is the AFR’s report on how our resource sector lapped up the better trade deal news: “Shares in BHP Group rose 2.1 per cent to $35.82, Rio Tinto shot up 2.3 per cent to $89.97, Fortescue Metals Group rose 4.1 per cent to $8.81, Woodside Petroleum was up 1.1 per cent to $31.22, and BlueScope Steel advanced 3.7 per cent to $11.86.”

A deal should be good for banks and they responded positively later in the week, with CBA up 0.9% to $78.77, ANZ 1.1% to $27.49, Westpac 0.8% to $28.75, and NAB 0.6% to $28.20.

Of course, this local market history stuff is all interesting but my focus is on the future and I’m hoping Donald will deliver a basis for stocks to go higher.

What I liked

• Lending to households rose by 3.2% in August, after a 4.3% lift in July. It was the biggest back-to-back increase in household lending in a decade.
• Excluding refinancing, the value of owner-occupier home loans rose by 1.9% in August, with investment loans up 5.7%.
• The number of dwelling starts rose by 1.1% in the June quarter – the first increase since December 2017.
• NAB’s business conditions index rose from +0.6 points in August to +1.6 points in September but the long-term average is +5.8 points.
• ANZ job advertisements rose by 0.3% in September after falling by 2.6% in August. Ads were down by 10.4% over the year to 157,638.
• International visitors to Australia rose by 3% to a record high 8.6 million over the year to June. Spending by international tourists increased by 5% to $44.6 billion – a record high.
• Media reports indicated that the UK and Irish leaders expressed hopes of a Brexit deal.
• President Donald Trump tweeted he would meet Chinese Vice Premier Liu He on Friday for further trade talks.

What I didn’t like

• The Westpac/Melbourne Institute survey of consumer sentiment index fell by 5.5% to 92.8 points in October – the lowest level since July 2015. 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 +1.1 points in August to a 6-year low of -0.3 points in September. The long-term average is +5.9 points.
• The 12-month moving average of the NAB profitability index fell to a 5-year low of +2.1 points in September, down from +3.5 points in August. The long-term average is +4.6 points.
• The value of loans to businesses fell by 2.1% in August.
• Currently, 207,269 homes are being built – the lowest level in 3½ years. House starts fell by 10.5% in the June quarter – the biggest decline in 10½ years. And $69.8 billion of residential and commercial building work was yet to be done (completed), down from the record high of $77 billion in June 2018.
• German Chancellor Angela Merkel and British Prime Minister Boris Johnson had spoken and she indicated that she had made clear a deal was “overwhelmingly unlikely”.
• US consumer prices were flat in September (forecast +0.1%), to be up 1.7% over the year (forecast 1.8%).
• The US producer price index fell by 0.3% (survey: +0.1%) in September – the biggest fall in eight months.
• The NFIB Small Business Optimism Index in the US fell by 1.3 points to 101.8 points (survey: 102 points) in September.

Be careful of annual numbers

Recently I’ve noticed that some economic stats look terrible on an annual basis but are actually improving on a near-term basis. For example, dwelling approvals, lending to households and ANZ job ads all improved recently but their annual story is really terrible. However, I know the past two years have been slow for the economy so I’m looking for turning points and they are there and maybe business and consumer confidence won’t start heading up until the current improving story becomes very public.

And that’s the job for Treasurer Josh Frydenberg.

Go Josh!

The week in review:

• A combination of several factors has seen Nike deliver incredibly steady revenue growth for an extended period of time. Here’s why Charlie Aitken thinks this will continue.
• Down in the sub-$1 space, there are plenty of interesting opportunities on the ASX – although investors who like to fish in these areas can’t always expect to see profits and dividends, and thus, incur a bit more risk. Here are 4 interesting scenarios of businesses that could easily leave their current share prices behind.
• Lance Roberts, chief investment strategist at Real Investment Advice, has charted three courses that the S&P500 share index could take, depending on what path President Trump chooses in his trade war with China. Since American stocks dominate the global share market, this week Percy Allan wrote that their fate will dictate investor sentiment everywhere.
• Identifying megatrends is the easier part of investing. Knowing when to buy into a megatrend at sensible prices and having the nerve to stick with the idea, is the bigger challenge. Faster-growing Asian equities are a good long-term prospect and here are 4 ways to get exposure.
• There were just two upgrades in Buy, Hold, Sell – What the Brokers Say this week.
• In Questions of the Week, Paul answered questions about XTBs and high yield stocks outside the top 50.
• If you missed last week’s webinar on value stocks, a recording is now available here.

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday October 14 – Credit & debit card lending (August)
Tuesday October 15 – Reserve Bank Board minutes
Tuesday October 15 – CBA Household Spending Intentions
Tuesday October 15 – Tourist arrivals (August)
Thursday October 17 – Employment/unemployment (September)
Thursday October 17 – Speech by RBA Deputy Governor

Overseas
Monday October 14 – China Trade (September)
Tuesday October 15 – China Inflation (September)
Tuesday October 15 – US Empire State survey (October)
Wednesday October 16 – US Retail sales (September)
Wednesday October 16 – US Beige Book
Wednesday October 16 – US NAHB Housing market index (October)
Thursday October 17 – US Housing starts (September)
Thursday October 17 – US Industrial production (September)
Thursday October 17 – US Philadelphia Federal Reserve index
Friday October 18 – China Economic growth (September quarter) 

Food for thought:

“If you can learn to create a state of mind that is not affected by the market’s behaviour, the struggle will cease to exist.” – Mark Douglas

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 week, Market Timing Australia’s Percy Allan shared this chart from Real Investment Advice that projects the movement of the S&P 500 if Donald Trump reaches a “small deal” with China. Read more in Percy’s article this week.

Source: Real Investment Advice

Top 5 most clicked:

• 4 stocks under $1 – James Dunn
• Buy, Hold, Sell – What the Brokers Say – Rudi Filapek-Vandyck
• 3 stock market scenarios – Percy Allan
• 4 ways to get exposure to faster-growing Asian equities – Tony Featherstone
• Questions of the Week – Paul Rickard

Recent Switzer Reports:

Thursday 10 October: Nike & 4 stocks under $1

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.