I guess I tipped a pullback was overdue and we’re now down for the fourth week in a row, with August costing us 4.5%, so I shouldn’t be too surprised. However, we’re still up 4.6% since the June 28 low and the S&P/ASX 200 index is up 12% since the February 12 low of 4765.3 and that was another reason for my pullback call.
Unfortunately, the pullback is bound to get more intense on Monday with Wall Street putting on a more dramatic drop than us after the Fed’s Eric Rosengren said in a speech that low interest rates could overheat the US economy. Being a voting member on interest rates, this was taken as a hint that rates could rise in September and stocks sold off. This guy was a dove, not keen to raise rates, so this hawkish reference was seen as significant and shows what happens when rates actually do go up or we get to December and nothing has happened.
The fear index shot up overnight and interest rate sensitive stocks, such as utilities, telcos and consumer staples, were sold off. The greenback went up and this hit commodity stocks but financials rose because higher rates in the US will help their bottom line.
This speech was a traders’ picnic and speculation was raised higher after a surprise speech was announced for Monday by another Fed member, Governor Lael Brainard, which ‘told’ the market that maybe this dove is also turning into a hawk!
Before this Wall Street fear, I had penned that pundits were blaming the European Central Bank’s boss, Mario Draghi, for underwhelming the market on Thursday with his ‘do nothing’ decision. However I think there are more important moves afoot that explain why this market seemingly is jumping at the nothingness of being between reporting seasons, hanging out for data, waiting for central bank actions and seeing what the maddies at OPEC and non-OPEC decide. And then, of course, there’s the US election, where Donald Trump looks like he’s back in the race!
Seriously, if you’ve made money this year and you’re a short-term punter getting in and getting out, why wouldn’t you be in the profit-taking caper right now?
Let’s look at the reasons for not being too excited about stocks now:
- The US markets are near all-time highs.
- The US Fed could raise interest rates in September. (I don’t think so, despite the silly dove to hawk stuff overnight but Goldman Sachs and Barclays do!)
- US economic data has been a little scratchy lately but I’m not worried about it.
- Donald is on the comeback trail.
- Japan is showing nothing promising on the economic front.
- China is not doing enough to convince us that it has stopped the falling growth rates.
- Europe is doing OK and maybe Draghi did nothing because he’s gambling that a recovery is possible.
- Locally, the good economic growth number – up 0.5% for the June quarter and 3.3% for the year – might delay or even stop the RBA from cutting rates. Lower rates are good for stocks, so vice versa applies.
- The stubbornly high Oz dollar is not encouraging investors who might want to speculate on a lower dollar helping a whole pile of companies.
- The Australian political scene might not be a plus but, as I argued this week on www.switzer.com.au [1], the economy has done better since Malcolm T replaced Tony Abbott. Of course, some of it links to Joe Hockey’s last Budget, which didn’t save him but I reckon it saved the economy from growing at a slower pace. That Budget plus the confidence effects that followed Tony’s exit and Malcolm’s arrival has also helped the economy, along with the lower interest rates.
Economics-wise, growth has returned to over 3%, unemployment has fallen from 6.2% under Tony to 5.7% under Malcolm and interest rates are 0.5% cheaper for borrowers.
Meanwhile, business confidence, according to NAB, went from 1 to 4 but it has been as high as 6!
Over the same time, consumer confidence went from 93.9 (where pessimists outnumbered optimists) to 101 (where optimists were on top!).
And last week saw that plans to invest by businesses for 2016-17 have increased three quarters in a row, which has even surprised many economists.
Malcolm might have had a political shocker but the economy has performed better than expected. Also, those National Accounts during the week showed that nominal GDP or income rose by 1.3%, which was the biggest jump since 2013. This is not only good for the Budget’s tax collections, it will shut those income recession squealers up!
As you can see, there are plenty of reasons for the stock market to be tending towards the negative but it’s nothing too worrying from my point of view.
So long as OPEC doesn’t hurt oil prices, Janet Yellen waits until December for her first rate rise for 2017, Hillary becomes President and nothing silly comes from all the central banks that we watch all the time, then I think stocks will head higher. My quote for the week came from Ninh Chung, head of investment Strategy and Portfolio Management at Silicon Valley Bank. And this is what he said: “We think U.S. interest rates will move higher, so we’re positioning our portfolios to take advantage of that.
When you look at the fundamentals of the U.S. economy, especially the labor market, we’re very close to full employment. Even if the Fed raises rates 25 basis points, I think that won’t slow down the economy.”
This tells me that the market will sell off when Janet raises rates but it won’t be long before smarties will be running back to stocks. So it will be another buying opportunity.
What I liked
- The economic growth numbers that saw 14 out of 19 industry sectors expand and the economy rack up 100 quarters or 25 years without a recession!
- In late August, dividends started flowing to shareholders from those companies that reported early in the recent earnings season. Conservatively around $24 billion (or around 1.5% of GDP) will be paid out by companies over the next few months and that should help the economy!
- The RBA’s decision, which I think shows it believes the economy is stronger than doomsday economists think.
- Economy-wide, sales rose by 0.6% in the June quarter. Sales are up 3.5% over the year – the biggest annual gain in 7½ years. (Great news!)
- Company operating profits rose by 6.9% in the June quarter to be broadly unchanged over the year. (Good solid news but not great, yet!)
- Job advertisements rose by 1.8% in August to 4-year highs. Job ads are up 8% on a year ago. (That has to be great news!)
- New car sales were up 4.6% in August to create a record for the year of 1,178,348 new sales. (More great news!)
- Our trade deficit narrowed from $3.25 billion in June to $2.41 billion in July. It was the 28th consecutive monthly deficit. The rolling 12-month deficit improved from $36.898 billion to $34.974 billion, which is the smallest deficit in eight months.
- In trend terms, tourist arrivals are growing at the fastest annual pace in 20 years.
- US consumer credit rose by US$17.71 billion in July, up from US$12.32 billion in June and forecasts of a gain of US$16 billion.
- The Beige Book in the US reported that the US economy expanded at a modest pace in July through late August. Most districts expect moderate growth in coming months.
- European company earnings results were, on balance, generally positive.
What I didn’t like
- This dove to hawk speculation on Wall Street but it does give us a preview of what might happen prior to the December Fed meeting on rates if they don’t move to raise on September 21.
- The number of loans (commitments) for budding home owners (owner-occupiers) fell by 4.2% in July but it could be an election effect. The value of home loan cancellations hit a record high of $1.46 billion in July, up 46% over the year.
- The ISM services index fell from 55.5 to 51.4 in August (forecast 55). All key components of the index were weaker in August.
- The nothingness of the G20 and what that group come up with when they get together!
Goodbye Glenn…
I didn’t always agree with the old RBA boss Glenn Stevens – too quick to raise rates and too slow to cut at times and you might recall my gentle barbs – but given how good our economy is compared to our rivals in the Western world, it says something good about his stewardship. His replacement looks like a good’un so the economy will still be in good hands.
Top stocks – how they fared
[table “210” not found /]The week in review
- I explained why the timing of the Fed rate increase won’t really matter, because it’s bound to deliver the same buying opportunity [2]!
- Paul Rickard reviewed our model income and growth portfolios [3] for the month of August. Our income portfolio continues to outperform the index.
- James Dunn told you where to look for the best dividend growth in FY17 and FY18. He’s shortlisted 10 stocks for each year [4].
- Barrie Dunstan explored the warning signs present [5] in the A-REITs sector.
- Roger Montgomery outlined why Vita Group (VTG) and Altium’s (ALU) full-year profit results were arguably two of the season’s best [6].
- The brokers downgraded Mirvac and Retail Food Group [7]. In our second broker report [8], Oil Search was in the good books but Woolies and Telstra were in the not-so-good books.
- Our Super Stock Selectors [9] liked Commbank, but Village Roadshow was out of favour.
- Charlie Aitken explained why CSL failed to impress this year [10].
- Tony Featherstone revealed whether there is value returning [11] to the share price of Blackmores, Bellamy’s and A2 Milk.
- And Aaron Minney told you what annuities are and how they work [12].
What moved the market?
- The Aussie dollar edged higher on the back of solid GDP and trade data.
- Wall Street moved higher after US economic indicators reduced expectations of a Fed Reserve rate hike in the near-term.
- And aged care stocks were hit following the fed government’s new guidelines on charging fees from residential aged care customers, but have since bounced back.
Calls of the week
- In his last meeting as RBA Governor, Glenn Stevens kept the cash rate on hold at 1.50%.
- Sam Dastyari made the call to fall on his sword and stepped down from Labor’s frontbench after coming under fire for accepting money from a Chinese-linked company.
- US President Barack Obama made the call to cancel a planned meeting with Rodrigo Duterte, after the Philippines leader insulted Obama as the “son of a whore”.
The week ahead
Australia
- Monday September 12 – Credit & debit card lending (July)
- Monday September 12 – Lending finance (July)
- Tuesday September 13 – NAB Business survey (August)
- Tuesday September 13 – Speech by Reserve Bank official
- Wednesday September 14 – Speech by Reserve Bank official
- Wednesday September 14 – Consumer confidence (Sept)
- Thursday September 15 – Employment/unemployment (Aug)
- Thursday September 15 – New vehicle sales (August)
- Thursday September 15 – Reserve Bank Bulletin
Overseas
- Tuesday September 13 – China monthly data (August)
- Tuesday September 13 – US NFIB Business optimism (Aug)
- Tuesday September 13 – US Federal budget (August)
- Wednesday September 14 – US Import & export prices (Aug)
- Thursday September 15 – US Producer prices (August)
- Thursday September 15 – US Retail sales (August)
- Thursday September 15 – US Industrial production
- Thursday September 15 – US Philadelphia Fed index (Sept)
- Friday September 16 – US Consumer prices (August)
- Friday September 16 – US Consumer sentiment (August)
Food for thought
The path to success is to take massive, determined action.
– Tony Robbins
Last week’s TV roundup
- For a look at the performance of various sectors and what ones are due for a ride higher, Paul Rickard joins Super TV [13].
- Harvey Norman’s Gerry Harvey joined the show to share the characteristics of successful businesspeople and winners [14].
- To discuss oOh! Media’s latest earnings report and how the company is performing, CEO Brendon Cook joins the show [15].
- In our LIC Masterclass series, Stephen Bruce joins Paul Rickard to discuss the key themes for the market [16] and the stocks Perennial like right now.
- Also in the series, chief investment officer at Contango Asset Management, George Boubouras, talks to Paul Rickard about the outlook for small and mid-cap stocks [17] and exciting growth opportunities.
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 also shows how this has changed compared to the week before.
This week the biggest mover was NextDC with its short position increasing 6.63 percentage points on last week to 9.50%.
Charts of the week
Best annual sales gain in 7 ½ years!
Some solid economic data came out this week, including economy-wide sales, which rose 0.5% in the June quarter and 3.5% over the year. That’s the biggest annual gain in 7½ years.
25 years of economic expansion
Australia has now had 25 years of consecutive economic growth and is a hot contender to beat the world record (26 years) held by the Dutch! The Aussie economy grew 3.3% over the past year – the fastest growth in four years.
Top 5 most clicked on stories
- James Dunn: Where to look for the best dividend growth [4]
- Peter Switzer: I don’t care when there’s a rate increase, it will be the same play [2]
- Charlie Aitken: CSL hits a speed bump [10]
- Paul Rickard: Portfolios hold gains in August [3]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [7]
Recent Switzer Super Reports
- Thursday 8 September: What happened? [18]
- Monday 5 September: Buying opportunity [19]
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.