Switzer on Saturday

Despite scary selloffs it looks safe to swim with stocks

Founder and Publisher of the Switzer Report
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Just when you thought it might have been safe to wade back into the tricky ‘waters’ of the stock market, along comes a cautious central banker and some very positive economic readings of the US economy and Wall Street uses it to sell-off. Of course it annoys me, but I have been warning that profit-taking was always on the cards, and I suspect we’ll see some more negativity on markets until a couple of things happen.

First, we need to get really good inflation readings. Second, job market data that says the US economy is slowing needs to be believable.

In a perfect investing world for us, these two “must- see” developments need to apply to both the US and local stock markets. When those ideal tailwinds happen, we’ll be able to set our sails for a nice period of profit-making from our portfolios. But until then, it’s a waiting game.

On the subject of waiting for an expected sell-off, which I’m betting is followed by lower inflation, rate cuts and another leg up for stocks, on Friday Wall Street rebounded from Thursday’s dumping of shares. This was because of better-than-expected Purchasing Manager Index news for the US economy, and the Fed minutes that showed rate cuts mightn’t be as close as hoped. They also didn’t rule out a rate rise!

This is how AMP’s Shane Oliver saw the Fed’s position, based on its last meeting: “…the minutes from the last Fed meeting three weeks ago leant hawkish with various participants willing to tighten further if needed and a number noting uncertainty regarding the degree of restrictiveness.

“However, this followed three hot inflation readings and so now is a bit dated with recent inflation and activity data coming in cooler.”

In fact, Fed Vice Chair Chris Waller indicated that “several more months of good data” was needed, before rates could be cut in September.

These kinds of Fed member reactions make me confident that selloffs will be less than serious, provided the economic data continues to suggest that inflation is falling and rate cuts, not rises, are eventually going to happen. And we’ll be off to the races with stocks if this can be achieved without fears of a US recession surfacing.

The soft-landing scenario with falling rates would be ideal for those of us playing the long game with stocks.

So, what was the Friday news that brought Wall Street out of Thursday’s tailspin for stock prices, with the Dow off more than 600 points?

CNBC’s market reporters think the Nvidia/AI news has trumped the fears that the Fed might take more time before it cuts interest rates. Ahead of the close, all three major market indexes were in the green, but an hour is a long time when you’re waiting for that last 60 minutes of trading at the New York Stock Exchange and the Nasdaq Marketsite at Times Square.

This week’s data revelations have led Goldman Sachs to push the first rate cut back from July to September, which partly explains the negativity about stocks on Thursday in the US and Friday locally. However, Nvidia’s earnings report has kept the enthusiasm for AI, and what potentially it could mean for stock prices of other companies, at high levels. “The enthusiasm over the AI giant and other tech names powered the market higher, even as concerns the Fed will not lower rates this summer lingered,” CNBC’s Hakyung Kim and Brian Evans wrote overnight.

And there’s also good news that the rally is broadening so it’s not as dependent on the big-tech Magnificent Seven companies to keep the indexes riding higher.

“While there was some angst last year over heavy concentration in big tech stocks, the market has broadened out significantly in recent months,” said Ross Mayfield, who’s the investment strategy analyst at Baird. “While concentrated markets have not historically led to bad returns, it is usually a sign of a healthier economy when breadth — the number of individual stocks and sectors that are doing well — is better.”

Mayfield described it as “more legs supporting the stool” and I can sit on and with that! In a nutshell, the case for remaining a believer that stocks can go higher over the next year or so, even with intermittent selloffs driven by short-term profit-takers, remains credible.

Go you good thing Wall Street!

To the local story and Wall Street’s challenges hurt our market with the S&P/ASX 200 off 86.8 points (or 1.11%) for the week to 7727.60 but we actually lost 84 points on Friday after the Yanks got better-than-expected economic data!

Bond yields went up as CBA lost 1.54% on Friday. For the week it gave up 1.76% to $118.87. NAB dropped 1.74% for the week to $33.96.

Anyone wanting a leg up for Star, it’s worth noting that the AFR reports that “Perpetual lifted its stake in ailing casino operator Star on May 21 from 7.4 per cent to 8.8 per cent just after news broke that Star had attracted takeover interest from a group including US hospitality operator Hard Rock.”

Meanwhile Appen gave long suffering shareholders a small piece of hope adding 6.8% after telling shareholders that it looks set to break even. And Xero had a good week after reporting better than expected, with its share price up 7.98% for the week to $131.18.

What I liked

  1. The rebound in Chinese shares, suggesting a potentially better outlook for Chinese growth ahead on the back of increasing government stimulus measures. The Shanghai Composite is up 14.8% since February.
  2. The ECB and Canada look like they might start cutting rates as early as next month.
  3. This from AMP’s Shane Oliver on rates: “In Australia, the next move in rates likely remains down. The minutes from the last RBA meeting suggest that while it still retains a tightening bias, its mild and the hurdle for another hike is high requiring upwards revisions to its 2025 and 2026 inflation forecasts.”
  4. Oliver again: “We are allowing for a 0.25% cut in the cash rate to 4.1% in November or December and two cuts next year.”
  5. The Melbourne Institute’s consumer survey for May showed a further fall in consumers’ one-year-ahead-expectations for inflation, which the RBA watches closely.
  6. Our PMI services number was down which is a good thing, given services inflation has troubled the CPI.
  7. A survey question in the Westpac consumer sentiment survey highlighted that consumers plan to save a high proportion of the coming tax cuts (with Westpac estimating around 80% will be saved based on the survey) and weak confidence points to ongoing weak consumer spending and this all helps inflation and interest rates fall.

What I didn’t like

  1. In the US, the minutes from the last Fed meeting three weeks ago leant hawkish with “various participants willing to tighten further if needed and a number noting uncertainty regarding the degree of restrictiveness.
  2. The US S&P Global Composite PMI improved to 54.4 in May’s flash estimate, up from 51.3, indicating that business activity in the US private sector continued to grow at a faster pace than in April. (This is good for saying the US isn’t heading towards recession, but it could mean rate cuts will be delayed, which isn’t good for stocks!)
  3. Meanwhile, the S&P Global Manufacturing PMI increased to 50.9 from 50 over the same period, signalling an expansion in the manufacturing sector. (Another good sign for growth but a bad sign for rate cuts!)
  4. Locally, while the cost and price components in the local PMI here are down from their highs, they appear to have stalled out in a relatively elevated range.
  5. Bond yields rose this week, which does not help rate cut hopes.

The week ahead has dramatic data drops

Stocks this week fell on guesses on what economic readings meant for inflation and comments related to inflation from Jerome Powell of the Federal Reserve. Well, this week more important stuff — economic data — is coming that will send stocks flying high or diving lower.

I want to see US economic growth, consumer confidence and the personal income and expenditure statistics, while the local April CPI could be huge for what we think about interest rate cuts or rises, stock prices and the $A.

Bring it on!

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