A big pullback in one day is always worrying and it’s even more concerning when some experts pull out the old “it’s a Minsky moment!” When one guy in the US did, CNBC rushed to report it. And all the Minsky fans would’ve cheered that their ‘beloved’ financial Armageddon was here at last!
What’s a Minsky moment? Wikipedia sums it up simply this way: “A Minsky moment is a sudden major collapse of asset values, which marks the end of the growth phase of a cycle in credit markets or business activity.” That old doomsday merchant and buddy of mine, Professor Steve Keen, is one of the world’s greatest groupies when it comes to Hyman Minsky, the 20th century American economist after who this ‘moment’ is named.
The GFC brought his long-ignored prophecy into focus because it was triggered by the sub-prime mortgage crisis. And the current huge growth of the stock market is powered by an unbelievable surge in cheap money, thanks to global central banks.
I must admit when I saw the big US sell off on Friday morning I thought we could be in for a Minsky moment because Wall Street had gone mad for many months on FAANG and other hi-tech stocks. But then I calmed down and said to myself that this was more likely a rotation out of tech into the stocks that will benefit from an economic rebound and reopening of the economy.
And my thesis looks more spot on than those praying for Hyman to have sixty seconds of fame. Overnight the Dow was down 159 points (after being off over 628 points) but driven by a good jobs report, which showed unemployment fell by a whopping amount — from 10.2% to 8.4% — and employment surged by 1.37 million jobs!
Consistent with reopening of an economy, as well as a rotation out of tech-oriented stocks into those stocks that were ignored post-crash and lockdowns, US banks had a good night. Bank of America was up 3.92% an hour short of the close, which supports my point.
Am I ruling out a Minsky moment? Yes, but if a vaccine doesn’t show up before year’s end, I could get nervous about this stock market comeback. For now, we can ignore headlines, like this from the AFR yesterday: “A US market bloodbath spilled into local trade on Friday as rattled investors handed the Australian share market its worst session in four months, shedding $56 billion in a 3.1 per cent dive.”
Sure, the S&P/ASX 200 Index lost 187.1 points (or 3.06%) to end at 5925.5 on Friday, but as the newspaper said, it only eroded “two buoyant days with its worst one-day performance since May 1.”
It’s been great that the market has been rising but a pullback (especially in the US) is overdue. But as I told you last week, the economic outlooks here and in the US are on the improve, despite the fact this week we had to endure all the recession talk that came out of the 7% slump in the months of April, May and June.
I liked this from one of the USA’s most respected economists, Ed Yardeni of Yardeni Research: “The worst of the hit from the coronavirus pandemic appears to be over and markets could see a rebound in revenues from here. All in all, we’re still seeing that economies are recovering pretty well from what was basically a lockdown recession.”
We’re now two months on and if Victoria had avoided its second lockdown, our economy would be even stronger and our stock market index would be higher. Anyone who saw our monthly webinar with Tribecca’s Jun Bei Liu would have noticed how often she referred to stocks that were set to benefit in coming months because of a gradual reopening of the economy. And that will result in more rotation out of say supermarket stocks like Coles into say travel stocks, though the latter could take more time and will be heavily dependent on a belief that a vaccine is becoming freely available.
To the local story this week and the S&P/ASX 200 Index lost 2.4% for the week. And the 5% wipe out of the Nasdaq on Thursday was no help and explained why Afterpay gave up 11.89%.
Meanwhile, a reopening stock such as Sydney Airport rose 6.53%, while AMP shot up 8.31% on the proposal to break up the company and sell off its parts.
It’s fair to say that our sell off was more widespread than Wall Street’s, with the banks down 2-3%, while the likes of BHP lost 3.8% and Fortescue 3.4%. That said, I think in the fullness of time this period of negativity, particularly if it extends to next week, will be seen as a buying opportunity, provided we don’t have any dramas over a ‘no show’ for a vaccine.
That’s when Minsky might get his time to star!
What I liked
- Retail trade rose by 3.2% in July (consensus: 3.3%) after rising by 2.7% in June. Retail trade is up 12% over the year.
- Australia exported a record $18.654 billion of goods to the US in the year to July.
- The broadest measure of international trade – the current account – was in surplus by a record $17.7 billion in the June quarter (consensus: $13 billion surplus) in seasonally-adjusted terms.
- Council approvals to build new homes rose by 12% in July (consensus: minus 2%), lifting from 8-year lows. Approvals are up 6.3% from a year ago.
- The CoreLogic Home Value Index of national home prices fell by 0.4% in August but was still 5.8% higher over the year. In capital cities, prices fell by 0.5% but were 6.3% higher over the year. Considering we’re in a recession, these house price falls are remarkably small.
- According to the CBA, card spending in the week to August 28 was up 1.4% on a year ago, compared to a 5.1% lift for the week ended August 21. Online spending rose 19.5% on a year ago (previous week: 26.2%) but in-store spending was down 5.8% (previous week: minus 3.8%). Victorian spending is down 13.7% over the period.
- ADP private sector payrolls in the US lifted by 428,000 in August (survey: 950,000).
- US factory orders rose 6.4% in July (survey: 6.1%).
- The Caixin China Services PMI eased from 54.1 to 54 in August (consensus: 53.9).Any reading above 50 indicates an expansion in activity.
- From Europe, signs of a recovery in global manufacturing sector drove chemicals up 2.2% to record highs.
- The Dallas Federal Reserve manufacturing index rose from minus 3 points to8 points in August (survey: minus 2 points).
What I didn’t like
- Those recession numbers, with the June quarter down 7%. The consensus was 6%, so it shows how scared we were in April and May before JobKeeper and JobSeeker kicked in and restrictions (as well as infections) eased.
- The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.7% to 90.2 (long-run average since 1990 is 112.7). Sentiment is still up by 38.1% since hitting record lows of 65.3 on March 29 (the lowest since 1973) but it’s all down to the Victorian issues.
- The IHS Markit ‘final’ services PMI was down from a record high 58.2 (since records began in May 2016) in July to 49 in August. The composite PMI fell from 57.8 in July to 49.4 in August. A reading below 50 indicates a contraction in activity.
- The AiGroup’s Performance of Manufacturing Index fell from 53.5 to 49.3 in August – the first contraction in activity in three months.
- The composite PMI fell from 57.8 in July to 49.4 in August. A reading below 50 indicates a contraction.
- The AiGroup Performance of Construction Index (PCI) fell from 42.7 points in July to 37.9 points in August – the 24thsuccessive month of contraction in activity.
- The trade surplus decreased to $4.6 billion in July (consensus: $5.35 billion surplus) from $8.1 billion in June. Australia has posted 31 successive monthly trade surpluses. The rolling annual surplus eased to $73.98 billion in the year to July from a record high $77.41 billion in the year to June. Rural exports fell by 15.1% in July – the biggest monthly decline since January 1983.
- In August, 60,986 new vehicles were sold – the weakest August sales month in 23 years – to be down 28.8% in August 2019. Victorian sales fell by 65.9% to 8,347 units. Once again, these falls in Victoria are over-influencing our national numbers.
- The US Federal Reserve Beige Bookreport showed a modest increase in activity for US businesses and an increase in employment through late August, while economic growth remained sluggish in parts of the country.
Does anyone remember when I gave it to the RBA?
There was a time on my old Sky Business TV show that I kept criticising the Reserve Bank for keeping interest rates too high for too long. I copped a few criticisms at the time but our economy was struggling and the Big Bank was more afraid of inflation that it needed to be. Well, all that came back to me this week when the RBA again left the cash rate at a record low of 0.25% after previously cutting rates on March 3 and March 19 this year, each by 25 basis points.
But this was the fact that brought it all back to me: “There have been 17 rate cuts since November 2011, with the cash rate cut from 4.75 per cent. Previously, rates rose seven times from October 2009 to November 2010 from 3 per cent to 4.75 per cent.” (CommSec)
I never expected we’d see 17 cuts but I knew the RBA was out-of-step with what was going on in the real world!
Now I hope our economy gets healthy enough so one day we can see rates rising. And by the way, after that 7% recession number, AMP’s Shane Oliver speculated that the RBA will cut the cash rate from the current 0.25% to 0.1%! I hope he’s wrong.
The week in review:
- In my article this week, I revealed 7 ‘secret’ stocks tipped by 7 experts. Read which stocks made the list [1] here.
- Paul Rickard shared 3 stocks that reported satisfactorily during earnings season [2] and met his requirements for good income stocks.
- Enjoying hearing which stocks passed Tony Featherstone’s tough test from reporting season? He continued this series with another 3 ‘star’ stocks he liked this week. [3]
- James Dunn shared his latest nominations for ‘5 Under 50 cents [4]’, ranging from industrials, to healthcare to tech.
- In Maureen Jordan’s “HOT” stocks [5], Julia Lee explains why she likes Mesoblast as a stock.
- In Buy, Hold, Sell – What the Brokers Say, there were 20 upgrades and 15 downgrades in the first edition [6] and 8 upgrades and 6 downgrades in the second edition. [7]
- In Questions of the Week [8], Paul Rickard answered your questions about taking up Tabcorp entitlements, whether Rural Funds Group was a good income stock and whether you should be following the Dow Jones or the S&P 500 index?
Our videos of the week:
- The best and worst of reporting season [9] with Jun Bei Liu | Monthly webinar
- 7 Experts! Their One Best Stock! Plus, CEO of NextDC – Check out the future! [10] | SwitzerTV: Investing
- How does a 7% recession have such small house price falls? It’s CRAZY! [11] | Switzer TV: Property
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday September 7 ANZ job advertisements (August)
Monday September 7 Credit & debit card lending (July)
Monday September 7 AiGroup Performance of Services index (August)
Tuesday September 8 Weekly consumer confidence index (September 6)
Tuesday September 8 Weekly CBA credit & debit card spending (Sep. 4)
Tuesday September 8 Weekly payroll jobs & wages (August 22)
Tuesday September 8 NAB Business survey (August)
Wednesday September 9 Lending indicators (July)
Wednesday September 9 Monthly consumer confidence index (September)
Friday September 11 Overseas arrivals & departures (July)
Overseas
Monday September 7 China international trade (August)
Monday September 7 US Financial markets closed
Tuesday September 8 US NFIB small business optimism index (August)
Tuesday September 8 US Consumer credit (July)
Tuesday September 8 US IBD/TIPP economic optimism index (Sep.)
Wednesday September 9 China inflation (August)
Wednesday September 9 US JOLTS job openings (July)
Thursday September 10 US Producer price index (August)
Thursday September 10 US Wholesale inventories (July)
Friday September 11 US Consumer price index (August)
Friday September 11 US Monthly budget statement (August)
Food for thought:
“Don’t worry about failure, you only have to be right once” – Drew Houston, CEO of Dropbox
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 chart shows the movement of the Nasdaq from 1995 to 2020, with the current price-to-earnings ratio of 32 well below the 65 at the peak of the Dotcom boom.
Source: Bloomberg, AMP Capital
Top 5 most clicked:
- The ‘secret’ 7 stocks 7 experts tip [1] – Peter Switzer
- 3 good income stocks I like [2] – Paul Rickard
- My 5 stocks under 50 cents [4] – James Dunn
- 3 more ‘star’ stocks I like [3] – Tony Featherstone
- Buy, Hold, Sell – What the Brokers Say [6] – Rudi Filapek-Vandyck
Recent Switzer Reports:
- Monday 31 August: My ‘secret’ 7 stocks 7 experts tip [12]
- Thursday 03 September: 3 more ‘star’ stocks I like [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.