Switzer on Saturday

Economic data good. Infections data bad. What’s more important?

Founder and Publisher of the Switzer Report
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Economic data in the US and a belief that a stimulus bill of either US$1.8 trillion or US$2.2 trillion is coming sooner or later has to explain why stocks are rising, despite a worrying lift in Coronavirus second-wave infections.

There’s no place in the world where the power of positive thinking works more convincingly than the USA!

You might ask why? And the answer has to be economic data plus the belief that the stimulus will happen soon plus the unbelievably low interest rates, all intermixing with US optimism, is trumping the negativity around the virus.

Fortunately, the lower relative death rate is helping markets cope with these rising infection rates and there is a belief that governments won’t try total closures and lockdowns a la Victoria.

“The Eurozone, the UK and Canada are now all seeing strong rising trends in new cases and the US is gradually rising, including in New York again,” said AMP’s Shane Oliver on Friday. “This is continuing to drive a tightening in restrictions. Fortunately, the number of deaths in developed countries remains well down compared to earlier this year, reflecting more testing picking up younger cases, better treatments (as perhaps seen with President Trump) and better protections for older people and this should help avoid a return to hard lockdowns.”

Locally, the Budget was a big boost for stocks — a $213 billion deficit will do that, especially one that targets consumers and businesses with $50 billion of tax relief.

Our S&P/ASX 200 Index closed the week 5.36% higher finishing at 6102.2, with financials up 7.5%, which at last has at least partially vindicated Paul Rickard’s and my positivity on our banks. This Budget will help shore up the banks’ loan-carrying customers with better job security, more income via tax cuts and greater business opportunities. Also, the actual money in this $213 billion deficit has to get banked by the recipients and it all improves the outlooks for financial businesses.

Economic sanity is making a comeback and the pro-business Budget that gave consumers a hell of a lot of firepower (and job creators a lot of encouragement) got stock buyers outnumbering sellers and prices headed north over the week.

Meanwhile, some commentators think that talk of a clean sweep for the Democrats at the November 3 election , who want a stimulus bill of US$2.2 trillion compared to Donald’s raised overnight offering of $1.8 trillion, is a plus for the market.

This is at odds with the view that a President Joe Biden will raise taxes and increase regulations on business, though it could say a bigger stimulus will make him more palatable to Wall Street. And there has to be those in business who might like a less unpredictable President, who’s more likely to negotiate rather than try and smash the likes of China and the EU.

Back to the local story and the consumer discretionary sector shot up 4.8% (a tax cut Budget will do that). And my new favourite, Zip Co, shot up 16% to $7.56 following good numbers for Sezzle’s third quarter. And those who have stuck with CIMIC would have loved the 20% spike on improving revenue, in a budget-environment worldwide bound to help companies in the infrastructure space.

Despite virus concerns, there’s a sense of optimism with bond yields rising, commodity prices trending up and the Australian dollar on the rise, which all speak to an improving global economic outlook.

That said, the risk is that this US tussle between the Democrats and the Republicans over stimulus (and a US election starring Donald Trump) could be a potential big spanner that could jam up Wall Street’s works.

Over the next few weeks to Melbourne Cup Day, which coincides with the US election, the focus will be on this stimulus battle. Stimulus says to the stock market to buy cyclicals (banks, materials and energy, and industrials) and that’s what we saw our Budget do to those kind of stocks this week.

What I liked

  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.7% to 15-week highs of 95.7 (long-run average since 1990 is 112.6). Confidence has lifted in seven of the past eight weeks. Sentiment is up by 46.6% since hitting record lows of 65.3 on March 29 (lowest since 1973).
  • ANZ job advertisements rose by 7.8% in September to 118,424 available positions. Ads have lifted for five successive months after falling by a record 53.2% in April.
  • The NAB business confidence index improved from minus 8.2 points to minus 3.8 points in September (long-term average is 5 points). The business conditions index lifted from minus 6.2 points to an 8-month high of 0.4 points. (long-term average is 5.2 points).
  • Housing finance commitments surged another 12.5% in August, with owner occupiers and investors seeing strong increases and an 18% rise in finance for first home buyers. The total value of new loans surging 12.6% was up more than 30% in just three months, Westpac says.
  • The trade surplus decreased to $2.64 billion in August (consensus: $5.05 billion surplus) from $4.65 billion in July. Australia has posted 32 successive monthly trade surpluses. The rolling annual surplus eased to $69.75 billion in the year to August from $73.01 billion in the year to July. Australia exported a record $18.88 billion of goods to the US in the year to August. Yes this number is down but it’s still big.
  • The IHS Markit services PMI rose from 49 in August to 50.8 in September. The composite PMI rose from 49.4 in August to 51.1 in September. A reading above 50 indicates an expansion in activity.
  • The ISM services index in the US rose from 56.9 to 57.8 in September (survey: 56.2). The final Markit services index fell from 55 to 54.6 in September (survey: 54.6).
  • The Bureau of Statistics (ABS) reported that between September 5 and September 19, national payroll jobs rose by 0.3%, with Victorian jobs up by 0.4%. National wages rose by 0.8% over the period.
  • US chain store sales in the past week were up 2.1% on a year ago, after lifting 2.2% in the prior week.
  • Miners rose after EU-based JP Morgan took an “extreme overweight” position on the sector.

What I didn’t like

  • New vehicle sales totalled 68,985 units in September, down 21.8% on September 2019.
  • Minutes of the last US Federal Reserve meeting were released, with participants worried that future fiscal stimulus may fall short of what’s needed.
  • CommSec reports that investors are worried about the growing number of coronavirus cases across Europe.
  • Shane Oliver says his “…US Economic Activity Tracker ticked down again in the last week, with falls in consumer confidence, hours worked, rail freight, and retail traffic, suggesting the US recovery may be stalling again and highlighting the need for additional fiscal stimulus”.

Only in America!

Source: Real Clear Politics

This chart shows how popular Joe Biden is compared to Donald Trump but would you seriously bet against Trump winning? Four years investing with Donald Trump in the White House has taught us to expect the unexpected when it comes to the US.

By the way, if you need another shot of optimism, have a look at my interview with Chris Joye on Thursday. The link is down below. When it comes to our economic and market outlooks, this guy is making me look conservative!

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday October 12 – Household impacts of COVID-19
Tuesday October 13 – CBA credit & debit card spending
Tuesday October 13 – Overseas arrivals/departures (August)
Tuesday October 13 – Weekly consumer confidence (October 11)
Wednesday October 14 – Consumer confidence (October)
Wednesday October 14 – Building activity (June quarter)
Wednesday October 14 – Overseas travel (September)
Wednesday October 14 – Speech by Reserve Bank official
Thursday October 15 – Reserve Bank Governor speech
Thursday October 15 – Labour force (September)

Overseas
Monday October 12 – China New vehicle sales (September)
Tuesday October 13 – US NFIB small business optimism (September)
Tuesday October 13 – US Consumer prices (September)
Tuesday October 13 – China International trade (September)
Wednesday October 14 – US Producer prices (September)
Thursday October 15 – US Presidential debate
Thursday October 15 – US Export & import prices (September)
Thursday October 15 – US Empire state manufacturing index (Oct)
Thursday October 15 – US Philadelphia Federal Reserve survey (Oct.)
Thursday October 15 – China Inflation (September)
Friday October 16 – US Retail sales (September)
Friday October 16 – US Industrial production (September)
Friday October 16 – US Consumer confidence (October)

Food for thought:

“Budget: a mathematical confirmation of your suspicions.” – A.A. Latimer

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:

With a deficit of $213.7 billion forecast for 2020/21, CommSec shared the following chart that shows how the latest ratio of budget balance to GDP (11%) compares with the last 120 years:

Top 5 most clicked:

Recent Switzer Reports:

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