It sounds too good to be true but we’re waking up to a great run of results on Wall Street, with continued good trade deal news, an energy price surge tipped, US industrial stocks in favour and bank stocks back in the good books, which is always a sign that optimists are in the ascendancy over pessimists.
Back on December 24, when the final quarter went within 0.5% of a bear market for the S&P 500 index, who would have expected that this index would’ve been lining up for seven weeks of gains on a trot? The Dow is actually up eight weeks in a row!
I wrote yesterday (for Switzer Daily), that it had been a bad week for doomsday merchants [1], just based on local economic data. But this Friday’s share price showing on the New York Stock Exchange and the Nasdaq Exchange, is the icing on the cake.
And while I love being proved right, after arguing that the December quarter sell off was another buying opportunity (and I said that with a fair degree of trepidation), I have to admit that I can’t believe this current run up won’t be tested. Profit-takers are always the first to raise doubts about what looks like an excessive episode of optimistic stock buying.
The next phase down is usually driven by believable narratives/stories that pose questions about the economy, corporate profitability and geopolitical threats. And so goes our stock price future.
But until that happens, understand that the Dow is now about 5% off its all-time highs and CNBC says industrials, energy and tech stocks are up 20% since those December lows.
Right now, the Fed’s decision to try “patience” with interest rate rises is the strongest driver for stocks, followed by the potential leg up that a Trump trade deal could deliver. But a lot of this current market lift could mean when a deal is struck, a lot of the gain would’ve already been built into stock prices. That said, a trade deal would have to be a great solidifier for stock market levels.
Definitely helping Wall Street was the Chinese leader Xi Jinping announcing that trade talks would continue in Washington next week. This follows President Trump speculating that if trade talks progress warrants it, he’d support a 60-day extension of the deadline from the end of February. This means any potential increase in tariffs to 25% would not only be delayed from their intended March 1 starting point but, in all likelihood, could be KO’d out of reality!
Adding to the market merriment was the latest University of Michigan’s preliminary consumer sentiment index for February, which rose to 95.5, exceeding the median forecast in a Bloomberg survey for an increase to 93.7. “The measure of current conditions rose 1.2 points while the expectations gauge jumped 6.3 points, indicating the rise in sentiment was concentrated in the outlook,” Bloomberg’s Chibuike Oguh reported.
Interestingly, this was measure of consumer optimism that was taken after the government shutdown had ended. More to the point, I didn’t take into account the effect of the shutdown when the January number created headlines such as this one from Yahoo Finance, which told us that “Consumer sentiment falls to the lowest level since Trump’s election…”
Explaining this comeback for stocks is simple: most of the potential bad news reverted to good news. The Fed took three rate rises off the table. Donald Trump showed he was flexible on a trade deal and China’s Xi Jinping is playing a cooperative role. OPEC and their rival oil producers aren’t hurting energy prices. China has put its hand up for tax cuts and bigger public spending to ensure its economic growth decline is arrested. The US government shutdown Mk II was averted this week and Germany dodged a recession headline by the skin of its teeth. So only Brexit and what it means for the UK and EU economies remains as the potential identifiable black swan that could rattle this market optimism. And of course, there are those largely unseen black swans that could turn market optimism into pessimism.
But that’s a story for another day. Let’s enjoy this market comeback.
On the local front, the market news is good but not as great as it is in the US. We lost 0.1% over the week and I think the election overhang isn’t helping, as economic data and company reporting was better than expected but we haven’t got anything to write home about. “The Australian December half earnings reporting season has been better than feared but shows a slowdown in growth and caution regarding the outlook,” said AMP Capital’s chief economist Shane Oliver to the AFR. “Concern remains most intense around the housing downturn and consumer spending.”
And this is what he told me: “So far about a third of results have been released. 60% of companies have seen their share price outperform on the day of reporting (which is above a longer term norm of 54%) and 45% have surprised analyst expectations on the upside, which is around the long-term average. But a more than normal 33% have surprised on the downside, the proportion of companies seeing profits up from a year ago has fallen and only 55% have raised their dividends, which is a sign of reduced confidence in the outlook – six months ago it was running at 77%.”
Banks had a bad week, with CBA down 5.3% but ANZ, which is starting to look like the new ‘darling’ of the sector, was only off 0.3%.
Not surprisingly, AMP lost 10.7% and I don’t think I’ll ever forget that its profit fell from $848 million to just $28 million, or 97% in one year! And some uninformed critics think the Royal Commission was ineffectual! Suncorp lost only 3.7% after a 44.7% drop in profits, thanks to the ‘heavy weather’ from four natural catastrophes!
But miners and industrials are helping the index. I have to say I loved Breville showing a 20% surge in profit on expansion and success in the German and Austrian markets and the share price rose 21.7%. Isn’t it great to know that real, non-digital businesses can still make ‘stuff’ and money.
I don’t know if the black cloud of an election will give us a break but better company profit reports would be a help. My only concern is that when our market is ready for a post-election run up after May 18, Wall Street could be ready for a “sell in May and go away” phase!
We certainly have made it hard for our stock market, with a Royal Commission, a regulators’ orchestrated house price fall and a pending election, where the government of the day has been shedding prime ministers, despite a pretty good economic performance. As a cynic friend of mine once lamented: “Life sucks and you don’t die!”
What I liked
- The Westpac/Melbourne Institute survey of consumer sentiment index rose by 4.3% to 103.8 points in February. The monthly increase was the largest in 33 months. A reading above 100 denotes optimism.
- The unemployment expectations index hit the lowest level in 7½ years, at 120 points in February and is down by 0.5% over the year to February.
- Melbournian consumers’ views on whether it was a good ‘time to buy a dwelling’ rose by 6.5% to a 5-year high of 125.1 points in February, which might help build a barrier to big price falls.
- According to data from the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 3.3 cents to 127.4 cents a litre in the past week and CommSec says: “Compared with the highs in October last year, Aussie families are saving on average $53 a month on filling the car with petrol – equivalent to a quarter per cent rate cut on a $350,000 mortgage!”
- The NAB business conditions index rose from a four-year low of +2.6 points to +6.6 points in January (long-term average +5.8 points).
- The NAB business confidence index rose from +2.7 points to +3.6 points in January but it is below the long-term average of 6 points, though still it was a move in the right direction.
- The average credit card balance recorded an increase of $4.44 (or 0.1%) to $3,264.56 in December but it was the smallest December increase in a decade. Credit cards are no longer a great guide to consumers’ interests in spending, as young Aussies are anti-credit cards and like the likes of Afterpay and Zip.
- Germany missed out going into recession by the skin of its teeth, with a zero growth quarter following a minus 0.2% quarter in September.
- Before Friday’s trade in the US, 80% of S&P 500 companies have now reported, with 72% beating on earnings, with an average beat of 3.3% and 60% beating on sales. Earnings growth is running at 18.5% year-on-year for the quarter.
- For European companies, Reuters reported that earnings for the last quarter of 2018 are now expected to rise 3% over the year, a more optimistic outlook than the 2.3% forecast made last week.
What I didn’t like
- The weekly ANZ-Roy Morgan consumer confidence rating fell 3.4% from two-month highs to 114.1. The index was higher than the longer term average of 113.1 points since 1990 but just below the average of 114.3 points held since 2014. However, the weekly reading of consumer confidence is too jumpy for me to get too excited about, unless I see six to eight weeks so I can see the trend.
- In the 2018 year, the number of dwelling approvals fell by 5.5% to 210,772 but it’s still an historically high number!
- The number of loans (commitments) by home owners (owner-occupiers) fell by 6.1% in December to a near 6-year low. This was expected and is not looking disastrous.
- AMP and Telstra reported badly and these are important stocks for the overall index.
- US retail sales fell by 1.2% in December (forecast +0.2%) – the biggest fall in nine years but I suspect the Government shutdown and the huge Internet effect of Black Friday and Cyber Monday sales means December becomes a rogue month. It happened in Australia and January bounced back, with spending indicators from the NAB and CBA both pointing to a rebound in sales in January.
- This is speculative but I still have to recognise it and not like it, with the New York Times telling us that “Halfway through the first quarter of the year, analysts now expect profits of companies in the S&P 500 to decline by 1.7 percent from the same period last year, according to data from John Butters, senior earnings analyst at FactSet.” (I’ll look at this in more detail on Monday.)
Revelation of the week
US Federal Reserve chair, Jerome Powell, said the US economy was growing at a “solid pace” and said that the probability of recession isn’t at all elevated. And if he’s right, then Citi’s Bear Market Checklist, which shows that there are only 3.5 out of 18 possible red flags, makes even more sense.
I really hope Mr Powell is an economic forecasting genius, though even if he is, given the rebound in stocks since December 24, we’re bound to cop some more fear and loathing sell offs. However, I don’t think they will be as mad, bad and as dangerous as what we saw at the end of 2018, until we’re ready for a serious crash! And for better or worse, that’s my job to pick!
The Week in Review:
- What do I think will happen to stocks in coming months? Find out here [2].
- Paul Rickard [3] looked at what’s next for the major banks, and in particular, the market leader, CommBank.
- Fairmont Equities MD Michael Gable [4] wrote that he is seeing signs of strength that suggest any market dips will be shallow.
- With interim reporting season getting into full swing this week, the stock market will have particular interest about currency. James Dunn [5] shared the market’s consensus view on 12 stocks that report in US$.
- Julia Lee [6] shared her list of stocks that have impressed so far in reporting season, ones to avoid and her favourite.
- Shane Oliver [7] from AMP Capital shared five charts and investing lessons for volatile and seemingly uncertain times like the present.
- The resilience of REA Group in particular and Carsales.com is underestimated according to Tony Featherstone [8].
- REA Group was also our Hot Stock [9] for the week from CMC Markets’ Chief Market Strategist, Michael McCarthy.
- In the first Buy, Hold, Sell – what the brokers say [10] of the week, there was more action on the downgrades side, and this trend continued in the second edition [11].
- And in Questions of the Week [12], we answered readers’ queries about NAB’s new hybrid security, our model portfolios and franking credits.
Top Stocks – how they fared:
What moved the market?
- Trade talks continued as US officials headed to Beijing
- Another US government shutdown is unlikely after Congress approved a border security deal
- Oil prices rose during the week, while iron ore prices were down
Calls of the week:
- Paul Rickard wrote [3] that, in the medium term, he believes CBA will get back to $80.
- Tony Featherstone believes [8] that REA Group will trade sideways or lower in the first half of 2019, and this will be the time to buy.
The Week Ahead:
Australia
Tuesday February 19 – Tourist arrivals/departures (December)
Tuesday February 19 – Reserve Bank Board minutes
Wednesday February 20 – CBA Business Sales Indicator (January)
Wednesday February 20 – Wage Price Index (December quarter)
Wednesday February 20 – Skilled job vacancies (January)
Thursday February 21 – CBA ‘flash’ purchasing managers index (February)
Thursday February 21 – Employment/unemployment (January)
Thursday February 21 – Average Weekly Earnings (November)
Friday February 22 – Testimony from Reserve Bank Governor
Overseas (dates subject to change)
Tuesday February 19 – US NAHB Housing Market Index (February)
Wednesday February 20 – US Federal Reserve meeting minutes
Thursday February 21 – US Durable goods orders (December)
Thursday February 21 – Markit ‘flash’ indexes (February)
Thursday February 21 – US Philadelphia Federal Reserve index
Thursday February 21 – US Existing home sales (January)
Thursday February 21 – US Conference Board Leading Index (January)
Friday February 22 – China House Price Index (January)
Food for thought:
“Risk comes from not knowing what you’re doing.” – Warren Buffett
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:
As seen in the Switzer Report this week [7], AMP Capital’s Shane Oliver shared a chart that shows the difference in current value for a $1 investment in cash, bonds and shares made in 1900:
Source: Global Financial Data, AMP Capital
Top 5 most clicked:
- What do I think will happen to stocks in coming months? [2] – Peter Switzer
- Can CommBank get back to $80? [3] – Paul Rickard
- Stocks that have impressed + my favourite [6] – Julia Lee
- Buy, Hold, Sell – What the Brokers Say [10] – Rudi Filapek-Vandyck
- What shares benefit when our dollar dives? [5] – James Dunn
Recent Switzer Reports:
Monday 11 February: Buying opportunities [13]
Thursday 14 February: Charts, lessons and tips! [14]
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.