Disappointing US growth will test Trump’s market magic

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It looks like President Trump might have come along at the right time, as US economic growth ended 2016 at a disappointing 1.9%! And considering that small businesses in the USA and Wall Street seem pretty excited, if you use the surveys and stock market indexes as guides, then Donald looks like the President the Yanks had to have!

This annualised growth figure was less than forecasters expected and contrasts with the September quarter reading of 3.5%!

Interestingly, it was trade – one of the President’s key political issues – that let the team down, coming in at the worst reading in six years!

One bright spot that might augur well for the future was the lift in business investment, which suggests that 2017 could be set to deliver a better growth story than 2016.

That said, this less than positive growth story will test Trump’s stocks market magic that has worked since his November poll win. Last week, I referred to how it would be the President’s policy promises up against the economy and earnings and if things didn’t work out, then a February pullback of stock prices was not inconceivable.

As I tap away for this communiqué, the Dow is down only 14 points. As you can see, there’s not any wrist cutting on the New York Stock Exchange but the level of wariness can’t be ignored.

For history sake, I should point out that US growth around 1.9% is consistent with the economy’s average and this was Bloomberg’s positive take on the result: “The strong job market and optimism among consumers and companies for President Donald Trump’s policies are likely to keep growth humming along in 2017, though tensions over trade could temper gains.”

Underlining the varying skills of economists, the growth guess range was as low as 1.7% but some were tipping as high as 2.7%. How do those guys explain that to their bosses?

Consumer spending was in line with expectations without going gangbusters but net trade ripped 1.7% off growth and it has to be a warning for the President not to get his trade play wrong. Hopefully, this could be a timely warning to Mr. Trump that he has to tread wisely with his trade play.

At home, our S&P/ASX 200 index went from 5671.50 to 5714, which was a nice 42.5-point gain (or 0.75%). And while inflation, which was a little disappointing, was given bigger focus from the media last week, it was the terms of trade reading that makes me believe our economy ahead justifies the current market optimism.

CommSec’s chief economist, Craig James, hailed the latest terms of trade (TOT) statistic as the biggest lift to income in 6½ years! Now TOT is often not understood by those who chose not to subject their young lives to the torture of economics but this summary of what it means for the Oz economy, along with related issues from James, is worth re-running here.

“One measure of incomes in Australia – the terms of trade, or ratio of export prices to import prices – has posted the biggest gain in 6½ years. But notably it is also the second  biggest lift in 43 years and third biggest increase ever recorded. If export prices are outpacing the price of imports, this indicates a broad-based lift to incomes in Australia. The lift in export prices – especially iron ore and coal – also serves to benefit the bottom line of the government accounts.”

But wait, there’s more.

James argues that “it’s not just coal and iron ore prices that are soaring. Sugar, oil and metals were amongst the commodities to record solid price gains in the December quarter.”

But wait, there’s even more!

“While manufacturers are experiencing higher prices, Aussie consumers are winners,” James explains. “Prices of imported consumption goods have fallen for four quarters to be down 4 per cent over the year.”

I rest my positive case.

What I liked

• Seeing this in the Australian Financial Review on Wednesday, which made my Australia Day: “Switzer Asset Management is ramping up plans for a listed dividend growth fund. James Packer-backed Contango Asset Management will manage the Exchange Traded Managed Fund Product (ETP) and the offer period is said to open on January 30, 2017.
  
  The active ETP market in Australia was thrown into the spotlight by listed manager Magellan Financial Group in 2015. Street Talk understands high-profile broker Charlie Aitken will be an independent committee member for the new Switzer large cap fund. It will be an open-ended raising and pitched at investors seeking consistent dividends and capital growth. Sources said the fund would be the first in the local market to pay quarterly dividends.
  
  Switzer Asset Management, previously known as Halidon Asset Management, is jointly owned by Contango and Switzer Financial Group.
  
  Financial commentator Peter Switzer is chairman of the group and Paul Rickard, the founding managing director of CommSec, is a non-executive director. The new fund will be the third listed product to be managed by Contango, adding to Contango MicroCap Limited and Contango Income Generator.”
• “The [US] domestic economy had real momentum heading into early 2017, even before any fiscal stimulus from the new Congress,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note after the report. “Don’t be deceived by the softish headline.” (Bloomberg)
• “The US December quarter earnings reporting season is also looking impressive. Roughly one third of US S&P 500 companies have now reported, with 75% beating earnings expectations and 54% beating on revenue.  Earnings are now expected to be up 5% from a year ago taking them to a new high, which is up from an expectation of 3.6% year on year, highlighting that the earnings recession that began in 2014 is long over.” (Shane Oliver, AMP.)
• That CommSec headline: “Biggest lift to incomes in 6½ years.”
• Despite the December quarter inflation result coming in at 0.5% rather than my hoped-for 0.7%, at least the annual rate did rise from 1.3% to 1.5%.
• The Chinese economy grew at a 6.8% annual pace in the December quarter, above forecasts (+6.7%).
• Chinese retail sales rose 10.9 % in the year to December. The result was the strongest result in a year and above the 10.8% annualised growth in the year to November.
• President Trump confirmed that taxes would be cut “massively” under his administration and that business regulations could be cut up to 75%.
• In the US, the Markit “flash” manufacturing index rose from 54.3 to 55.1 in January (forecast 54.5) and the influential economic indicator – the Richmond Federal Reserve composite index – rose from +8 points to +12 points in January.
• The Markit “flash” services index rose in the US from 53.9 to 55.1 in January (forecast 54.4).
• European shares edged higher to fresh 1-year highs on Thursday, supported by mergers and acquisition activity.
• Eurozone business conditions based on PMIs remained strong in January, pointing to a slight acceleration in economic growth.
• The Prime Minister, Malcolm Turnbull having a crack at Trump when he cancelled the USA’s involvement in the Trans-Pacific Partnership. The PM virtually said “Well, let’s see if China wants in.” Even if the Japanese might not have supported the idea, at least our national leader was not laying down and copping it. As the old saying goes: “No guts, no glory!”

What I didn’t like

• US new home sales fell by 10.4% to a 536,000 annual rate in December (forecast 588,000).
• The ANZ/Roy Morgan consumer confidence rating eased from four-month highs, falling by 1.9% to 117.0 in the week to January 22. However, confidence is up 3.4% over the year and well above the average of 113.1 since 2014.

On my pullback call

As you can see, the good news is ‘out-trumping’ bad news but the market has run up so well and February often brings a re-evaluation of stocks, so that’s why I’m a little nervous that another buying opportunity could be on the way! And if anyone wonders why I think 6000 on the S&P/ASX 200 looks a possibility this year, again just look at what I liked versus what I didn’t like.

Top stocks – how they fared

The week in review

• This week ^[1], I explained what US President Donald Trump’s first 100 days in office could mean for our portfolios.
• With the Australian earnings season just around the corner, how are the sectors tracking? James Dunn revealed what the analysts expect ^[2].
• The price of lithium has doubled over the past year as the metal becomes more attractive, but there are risks to consider. Max Williamson explored lithium’s appeal ^[3].
• CSL and Origin were in the good books ^[4] with the brokers this week, while Commonwealth Bank and Santos were downgraded.
• And our super stock selectors ^[5] liked the banks this week, but Brambles was out of favour.

What moved the market?

• The Dow Jones breaking through 20,000.
• Better-than-expected quarterly reporting results in the US.
• Week one of the Trump administration, with promises of tax cuts, regulation rollbacks and infrastructure spending.
• And Australia’s lower than expected CPI figure for the December quarter.

Calls of the week

• ‘The Donald’ signed an executive order to withdraw the US from the Trans-Pacific Partnership (TPP) trade deal. Read David Speers’ article ^[6] on why week one of the Trump era hasn’t been too good for poor ol’ Turnbull.
• Qantas chief executive, Alan Joyce, told the AFR that he’s considering a tech revamp of Qantas’ network by replacing its Boeing 747 jumbos with jets that can fly non-stop between Sydney and London or New York by 2022.
• And the new NSW Premier, Gladys Berejiklian, said one of her top priorities would be improved housing affordability.

The week ahead

Australia

• Tuesday January 31 – Private sector credit (December)
• Tuesday January 31- NAB business survey (December)
• Tuesday January 31 – Weekly consumer sentiment
• Wednesday February 1 – Selected Living Cost indexes (Dec quarter)
• Wednesday February 1 – Home value index (January)
• Wednesday February 1 – Performance of Manufacturing (January)
• Thursday February 2 – International trade (November)
• Thursday February 2 – Building approvals (November)
• Friday February 3 – New car sales (January)

Overseas

• Monday January 30 – US Personal income (December)
• Monday January 30 – US Pending home sales (December)
• January 31/February 1 – US Federal Reserve meeting
• Tuesday January 31 – US Case-Shiller home prices (November)
• Tuesday January 31 – US Consumer confidence (January)
• Wednesday February 1 – US ISM manufacturing (January)
• Wednesday February 1 – US ADP National Employment (January)
• Thursday February 1 – China Purchasing managers (January)
• Thursday February 2 – US Challenger job layoffs (January)
• Friday February 3 – US Non-farm payrolls (January)
• Friday February 3 – US Factory orders (December)
• Friday February 3 – US ISM services (January)

Food for thought

“A business is simply an idea to make other people’s lives better.”

– Richard Branson, founder of Virgin Group

Last week’s TV roundup

• The IPO for the Switzer Dividend Growth Fund opens Monday, January 30. To discuss what’s involved, as well as his outlook for stocks, Contango’s George Boubouras joins the show ^[7].
• For a look at Australian Foundation Investment Company’s (AFIC) recent results and how the business plans to invest in 2017, managing director Ross Barker joins Super TV ^[8].
• Is a technical recession possible? Could there be another interest rate cut from the RBA? To answer these questions and more, AMP Capital’s Shane Oliver visits Super TV ^[9].

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.

This week, one of the biggest movers was Mayne Pharma, with its short position increasing 1.05 percentage points to 9.27%.

Source: ASIC 

Chart of the week

The Dow cracks through 20,000!

Source: Yahoo!7 Finance

The big news story this week was that the Dow beat (the once hard-to-beat) 20,000 level! Could this rally go higher?

Top five most clicked stories:

• Peter Switzer: Don’t expect a Trump market sell-off unless… ^[1]
• James Dunn: Earnings season preview ^[2]
• Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say ^[4]
• Paul Rickard: Our growth-oriented stock portfolio for 2017 ^[10]
• Tony Featherstone: 4 oversold small caps ^[11]

Recent Switzer Super Reports

• Monday 23 January, 2017: Trump centre stage ^[12]
• Thursday, 19 January: Trump trade v China ^[13]

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.