It has been a big week for stock market gains here and in the US with two “don’t fight” drivers explaining how equities keep defying gravity. The first is the most famous “don’t fight” warning i.e. “don’t fight the Fed”. Smart market players demonstrated that they’ve learnt this lesson well and truly this week, with the S&P 500 up about 2.2% for the week.
The second is don’t fight Donald! More on that later.
At home, the S&P/ASX 200 Index rose 96.8 points (or 1.5%) to 6650.8 over the week. AMP Capital’s Shane Oliver reminded us that we “are now just 2.6% away from the resources boom high reached on 1 November 2007.” This was the high reached ahead of the GFC (i.e. 6828) and has been one benchmark our market has struggled to beat for over a decade!
But it hasn’t just been a fear-the-Fed thing. Just about all the world’s central banks have taken a leaf out of the most influential central bank. Now we have stock players refusing to fight Dr. Phil and his local RBA. Meanwhile, the ECB in Europe has its ‘Super Mario’ Draghi giving out “we will stimulate” messages that markets heeded and therefore got out there and bought, big time!
It’s as though the cool guys of global central banks have had a drinks session and concluded that Donald’s trade war, so far, has changed the outlook for economic growth and there was only one course of action ahead – cut interest rates and if needed, opt for quantitative easing (i.e. increase the money supply). Until there looks like a real chance of a recession, stock markets were happy to use this new monetary policy approach to buy stocks.
In the US, Jerome Powell is being bullied by the US President not to be himself, with the big guy doing publicly what no Western leader has done publicly, when he virtually warned him that his job was on the line ahead of the Fed’s interest rate committee meeting!
The US smarties in the money market have a rate cut for next month at, wait for it, 100%! You could say Jerome has copped a real trumping.
At home, the RBA’s Dr Phil used a speech on “The Labour Market and Spare Capacity” to nearly town cry a tip that another rate cut is coming. This is what he said. You decide if it was a huge tip or not. “It is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.”
Anyone who doubts that central bankers are chatting to each other should note that the European Central Bank’s boss, Mario Draghi, was talking this week about a “fresh stimulus” that may be applied as early as the July ECB meeting.
At home, Dr Phil explained his U-turn on the economy that our market has liked. “Given the amount of spare capacity in the labour market and the economy more broadly, [RBA board] members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.”
You can expect that cut on Tuesday week and both the CBA and NAB economics teams have told us they expect this to be the case.
CommSec’s Craig James puts our situation this way: “Australia’s stellar run of jobs growth over the past 2½ years has lost momentum in recent months,” he wrote this week. “Unemployment has edged up and employment growth appears likely to moderate if weaker job vacancies data is any guide.”
Adding to the reason to buy stocks was another episode of the long-running show called “Don’t fight Donald”. In another of his legendary tweets, we learnt that he “Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting.”
It was like Donald knew what the market and people/influencers like me needed to hear so we’d tell our followers that it was wise to remain long stocks. And he delivered.
Of course, things could change next week but with the G-20 meeting in Osaka, Japan, as of Friday, the expectation that we’re closer to a trade deal has really helped stocks head higher. I’ve always argued an actual signing will be a huge relief and you’d have to expect another big leg up for stocks if that deal is inked, even accepting the old cliché, “buy the rumour, sell the fact.”
Why do I argue this? Well, this global economic slowdown, which could be the forerunner to a worldwide recession, had its beginnings in Donald’s trade war. Only eight months ago, central bankers were preparing for three interest rate rises in the US. The growth implications there and worldwide were making the likes of Powell, Lowe and Draghi think that it was rises not cuts that they’d be managing in 2019.
That was then. This is now. The big watch for the next six months will be: When will the Yanks see a cut? And also, have local interest rate reductions started to help the economy?
If economies don’t respond to easier monetary policies, key market players could pocket profit and go defensive, which could really hurt stock prices. That will be my watching brief for you over coming months so stand by.
Back to the local market and energy stocks rose on higher oil prices, with the likes of Woodside up 5.9% for the week. And the recent measure of market positivity i.e. the share price of Afterpay, said it all with the new age pay business up 10.5% for the week.
And with fear of economic slowdown talk capturing the attention of central bankers, it has also got gold bugs really happy. “Northern Star Resources rose 10.9 per cent to $11.69, St Barbara advanced 10.9 per cent to $2.96, Newcrest Mining added 6.2 per cent to end the week at $32.00 and Resolute Mining closed 7.1 per cent higher at $1.21,” the SMH reported on Friday.
Losers included Vocus, off 26.6% after another suitor, AGL, jilted the telco after only a week of checking out its vital statistics and Caltex copped it, after warning about a 59% drop in profits for the past six months! Its share price slumped 10.5%. (Interestingly, Investor Mutual’s Anton Tagliaferro, actually likes Caltex. See what he has to say in Monday’s edition of our new SWITZER program. It’s shown on www.switzer.com.au [1] and on YouTube and should be there by 7.30pm.)
What I liked
- Employment rose by 133,400 in the three months to May after a gain of 65,200 in the previous three months. Over the past 12 months, 363,200 people have found jobs.
- Australia’s population expanded by 404,783 people over the year to December 2018 to 25,180,200. Overall, Australia’s annual population growth rate rose from 1.6 to 1.63%. A record 314,900 babies were born in 2018.
- The Bureau of Statistics reports that Australian home prices fell by 3% in the March quarter to stand 7.4% lower over the year. The number of established house and attached home transfers in Sydney fell to 12,161 in the March quarter – the lowest level since March 2002. (Sure, it’s a negative number but it’s miles better than what was predicted by my critics who think we’ll see a 40% collapse!)
- Economy-wide spending continued to record above-average growth in May. The Commonwealth Bank Business Sales Indicator (BSI) rose by 0.7% in trend terms, matching the growth of spending in March and April. Spending growth remains above the 0.4% long-term average monthly growth pace. (At a sectoral level, 14 of 19 industry sectors rose in trend terms in May, with three sectors broadly flat. In April, 12 of the 19 sectors posted gains in sales, with three sectors flat.)
- The leading index in the US was unchanged in May. (The forecast was up 0.1% but at least it wasn’t going deeply negative.)
What I didn’t like
- In trend terms, the Internet Vacancy Index (IVI) fell by 0.7% (the fifth consecutive monthly decline) to 81.1 points in May. The index is 5.7% lower than a year ago – the biggest annual decline since December 2013.
- The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.3% (the third successive weekly decline) to 114.2 points. Consumer sentiment is slightly below the average of 114.4 points held since 2014 but remains above the longer-term average of 113.1 points since 1990.
- The New York Empire State Manufacturing Index fell by 26.4 points (the largest ever monthly fall) to -8.6 points (consensus: +11 points) in June, the lowest level since October 2016.
- The NAHB Housing Market Index in the US fell by 2 points to 64 points (consensus: 67 points) in June.
- The Philadelphia Federal Reserve index fell from +16.6 points to +0.3 points in June (forecast +11).
(You can see why the Fed might want to cut rates.)
A weird one…
The best story of the week that was going to help our economy and stock prices was Westpac reducing the high interest rate used to see if borrowers could endure rising rates.
The AFR told us on Thursday that: “Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent.”
As a consequence, I wrote in Switzer Daily that: “The serviceability floor, which is the minimum interest rate a borrower must be able to pay, has been reduced to 6.5% from 7.25%. That change will spread from bank to bank and borrowing should pick up.”
But then on Friday we learnt that APRA bounced Westpac and the bank withdrew its planned help for low risk borrowers. I rip into APRA in my Weekend Switzer piece today. See my story, which I call: “Does Josh Frydenberg have the rocks to rock APRA?” here. [2]
I know what Donald Trump would do to APRA!
The week in review:
- I’d like to find my next BHP, which I got the hots for in early 2016. However, given the state of the world economy and what’s happening to stock markets, here’s what I like and don’t like right now [3].
- ATO data shows SMSFs are massively underweight offshore investments. Is this hometown bias extraordinary for good reason or is it because some trustees don’t know how to invest offshore? Or following a decade long bull market, do they feel it’s too late? In his article this week [4], Paul Rickard tell you everything you need to know.
- Charlie Aitken wrote [5] that we’re in a “TINA” state, where “There is no alternative” to stocks. With no real return in cash or fixed interest and arguably flat rental and capital growth returns in property, all roads lead to equities. But which road do you take?
- Tony Featherstone put forward 4 strategies [6] to help make a portfolio more defensive that suit conservative investors wanting to achieve higher yield while preserving portfolio capital.
- With rain starting to fall in many parts of Australia, investors’ attention is starting to turn to the agricultural stocks. For the Report this week, James Dunn looked at 5 of our top agricultural businesses [7].
- CMC Markets’ Chief Market Strategist Michael McCarthy chose Challenger (CGF) as this week’s Hot Stock [8].
- Downgrades outnumbered upgrades once again in the first Buy, Hold, Sell – What the Brokers Say [9] this week, while there 4 companies were upgraded and 2 downgraded in the second edition [10].
- In Questions of the Week [11], Paul Rickard answered readers queries about why a boring bond fund gained 9% this year, if there any short positions in bank stocks, Challenger and if it is too lase to invest in shares.
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday June 24 – Speech by Reserve Bank Governor
Tuesday June 25 – ANZ-Roy Morgan consumer confidence
Tuesday June 25 – Australian business 2017/18
Wednesday June 26 – Engineering construction (March quarter)
Thursday June 27 – Finance and wealth (March quarter)
Friday June 28 – Private sector credit (May)
Friday June 28 – APRA bank statistics (May)
Overseas
Monday June 24 – US National Activity index (May)
Tuesday June 25 – US Federal Reserve Chair Powell speech
Tuesday June 25 – US S&P/Case Shiller home prices (April)
Tuesday June 25 – US Consumer confidence (June)
Tuesday June 25 – US New home sales (May)
Tuesday June 25 – US Richmond Federal Reserve index (June)
Wednesday June 26 – US International goods trade (May)
Wednesday June 26 – US Durable goods orders (May)
Thursday June 27 – US Economic growth (March quarter)
Thursday June 27 – China Industrial profits (May)
Friday June 28 – US Personal income/spending (June)
Friday June 28 – US Consumer sentiment (June)
June 28-29 – G20 Osaka Summit
Food for thought:
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” – Benjamin Graham
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:
AMP Capital’s Shane Oliver wrote this week that there have been three ‘global growth scares’ over the past decade that have each seen shares fall roughly 20%:
Source: Bloomberg, AMP Capital
Top 5 most clicked:
- Desperately seeking Switzer’s favourite stock [3] – Peter Switzer
- My HOT Stock – Challenger (CGF) [8] – Maureen Jordan
- Is it too late to invest offshore? [4] – Paul Rickard
- Equities: they’re “simply the best” [5] – Charlie Aitken
- Buy, Hold, Sell – What the Brokers Say [9] – Rudi Filapek-Vandyck
Recent Switzer Reports:
Monday 17 June: My favourite stock?; investing offshore; and agricultural stocks [12]
Thursday 20 June: What’s Tina got to do with it? [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.