[table “182” not found /]
Just when we thought the US economy was one reliable performer, set to cope with its second interest rate rise maybe in June if not July, along comes this very odd looking jobs number, which throws a real spanner in the works.
The May jobs report produced the worst employment-creation effort in five years! Get this: 164,000 were expected but only 38,000 showed up! And to make matters worse, the April figure of 160,000 was revised down to 123,000.
I have to argue that this looks like a hard-to-trust outlier and I’m not alone.
“I think this employment number was a fluke and an aberration,” said Peter Cardillo, chief market economist at First Standard Financial to CNBC. “I don’t think it points to a real slowdown. Investors are beginning to have second thoughts about it.”
The Dow was down over 140 points early but at Wall Street’s closing bell, it finished down 31.
Generally, economic data lately has been positive but the first quarter of US economic growth was only 0.8% and that was the annualized rate, so the quarterly rate was only 0.2%! Forecasts have the Yanks growing over 2% but this week, the OECD tipped only 1.8% and called on governments worldwide to start spending or else this current low growth trap will persist.
By the way, other economic data overnight from the US was largely good, with the Markit PMI for services at 51.3, which means the sector is still expanding, albeit at a slightly slower rate. Meanwhile, factory orders were up 1.9% in May.
So let’s see this number as a one-off from left field but it makes my call of a July US rate rise more likely rather than the June call many have been pushing. The Fed will want to look at another month of job numbers and get the UK’s Brexit vote out of the way before it asks the US stock market to endure the first rate rise of 2016.
That’s enough on the American rogue number, let’s put the spotlight back on Australia.
Our stock market couldn’t cut it for eight weeks in a row but seven rises were a ripper and given we’ve entered the terrible month of June, which is historically challenging for stocks, this sell off makes sense.
And when you throw in the 14.8% gain for stocks since February 10 up to the end of last week, a bout of profit-taking makes sense, if not dollars, for those more short-term traders, who like to try to time the market.
The sell off of 1.6% was pretty damn well measured and I did like the 0.7% kick up on Friday, showing that there’s sufficient good news out there to stop us doing a repeat of January and early February, when market madness dominated, pushing stocks down to silly levels. (I am hoping that the majority agrees with me on those US job numbers to justify my position). The comeback since mid-February proves my point, with economic readings and company earnings ending up being better than the doomsday dramatists predicted and acted upon.
So why the negativity? Well, you can’t ignore the Fed decision next week and the Brexit vote on June 23. Watching oil and iron ore prices will be crucial as well. If these suckers can resist gravity to a reasonable extent, then any June stocks slide will be notable but not excessively worrying.
Either way, any sell off remains a buying opportunity and smart fund managers have been dumping the stocks they’ve made money out of recently, so they can buy them again when the pull of gravity weakens.
We finished at 5318.9 on the S&P/ASX 200 index but I’d be surprised if we see 5100 again this year. If we did, I’d be begging and borrowing to buy at those levels.
One US analyst says we should brace ourselves for a rotation back into financials soon. Let me warn you, this anti-bank thing right now is not just a local problem – it has been a worldwide phenomenon and if US banks spike, expect our world class rivals to enjoy the new attitude to them that could be around the corner. (This won’t happen until we see another good jobs number in the US.)
Another reason why our market had a bad week was the good news on the economy. You know I was talking up the ‘world’s best economy’ and that 1.1% growth number for the March quarter means we grew at 3.1% for the year and no Western economy is in the same class as our little Aussie bleeder economy. We’ve been growing for 100 quarters and the world record of 103 held by The Netherlands is in our sights and we will do it.
This growth rate is a four-year high and I reckon profits will soon come in better than expected, which will take stocks up another level. Of course, the good growth result reduces the chances of more rate cuts, though one more is possible and this realisation didn’t help stocks.
However, I’d rather a stock market driven by higher economic growth than one that responded to the ‘joy’ of lower interest rates.
June will be a big test for commodities prices and, in turn, this will drive the stock market but so will crucial economic data from the likes of China, Europe, Japan and, of course, the US.
What I liked
- The March quarter economic growth number was 1.1%, taking annual growth to 3.1% (this is found by adding the past four quarters).
- The ABS upgraded the December quarter growth guess from 0.6% to 0.7%.
- The Reserve Bank takes the last two quarters – 0.7% and 1.1% – adds them together and multiplies them by two to make the past six months annualized and this comes in at a solid 3.6%!
- Growth is now the fastest in four years.
- The CBA’s look at economy-wide sales is at a six-year high.
- The CoreLogic RP Data Home Value Index of capital city home prices rose by 1.6% in May, after lifting by 1.7% in April. Home prices were up by 10% over the year to May and dwelling prices rose in seven of the eight capital cities in May (Perth prices fell 2.7% but this is the mining state, so you’d expect that.)
- The Performance of Manufacturing index eased further from 12-year highs in May, down 2.4 points to 51. A reading above 50.0 indicates that the sector is expanding. The index has been above 50 for 11 months – the longest period of expansion since September 2006!
- Dwelling approvals rose by 3% in April. The value of all building soared by 18.3% – the biggest monthly rise in four years. CommSec says “building was at record highs in trend terms”.
- Private sector credit (lending) rose by 0.5% in April to stand 6.7% higher than a year ago – the strongest growth in seven years.
- Australia’s export of services rose by 1.6% in April to record highs. Annual growth stands at a 15-year high of 18.9%. Tourism-related credits are rising at the fast rate since the Sydney Olympics. (CommSec)
- There were 96,672 new cars sold in May. Over the year to May, a record 1,172,402 new cars were sold. Annual growth of 4.3% is the strongest in 31 months. And some honky economists think we have a weakening economy! Sure we have and as I suggested this week in one of my www.switzer.com.au [1] stories, some of these guys and gals need to start looking at www.seek.com.au [2] before it’s too late because they must be on borrowed time, given their weak forecasting skills!
- In the US, personal income rose by 0.4% in April (forecast 0.4%), with spending up 1.0% (forecast +0.7%). It was the biggest lift in spending in more than six years.
- The ISM manufacturing index in the US rose from 50.8 to 51.3 in May (forecast 50.4).
- The ADP survey of private sector employment recorded a 173,000 lift in jobs in May (forecast 175,000). The Challenger survey showed job layoffs fell from 65,141 to 30,157 in May, which is huge!
What I didn’t like
- That US non-payroll report with only 38,000 jobs in May – they look untrustworthy, trend-wise.
- The ANZ/Roy Morgan consumer confidence rating fell by 2.2% to 113.2 in the week to May 29. But the reading on whether it was a good time to buy a major household item rose to 5-month highs (highest since January 10).
- Sales rose by just an OK 0.2% in April after a 0.4% lift in March but sales have lifted 3.6% over the past year, which is OK.
- US consumer confidence fell from 94.2 to 92.6 in May (forecast 96.0).
- The Chicago purchasing managers index eased from 50.4 to 49.3 in May.
- OPEC failed to set new production quotas in Vienna but what do you expect of these guys? (You can safely use ‘guys’ with these politically incorrect guys!)
- Markit’s Caixin China General Services Business Activity Index fell to 51.2 in May, from 51.8 in the previous month. This is still an expansion number – anything over 50 is – but I want to see some big spikes in China for this key jobs sector.
Note:
These job numbers should power negativity on Monday, adding to my view that the expected May selling of stocks could easily be a June swoon or fainting, as it often has been. Check this chart out:
[3]Source: www.squirrelers.com [4]
However, on a 40-year basis, February and September have been the worst by a country mile. In fact, June is positive, up 0.29% but it’s the third worst positive performing month behind July and August, which makes me a little nervous about the next few months.
Top stocks – how they fared
[table “181” not found /]The week in review
(click the blue text to read more)
- This week [5], I reminded you why banks are still a great investment!
- My mate Paul Rickard took Investors Mutual Equity Income Fund for a road test [6].
- Roger Montgomery [7] discussed whether keeping some powder dry is a good idea.
- Our Super Stock Selectors [8] put Origin and Spotless on their likes list, but Qantas was out of favour.
- If you’re a dividend growth seeker, Charlie Aitken wrote on one stock he says is Australia’s Berkshire Hathaway [9] (more on this below).
- Tony Featherstone gave you three market darlings [10] – Sydney Airport, Transurban Group and Macquarie Atlas Roads Group – to consider taking profit in.
- Tony Negline shared a useful super splitting strategy [11] in light of the Coalition’s proposed super changes.
- The brokers [12] placed Medibank Private and Iluka Resources in the good books. In our second broker report [13], Duet Group was in the good books while CSL and FlexiGroup copped downgrades.
What moved the market
- The Aussie dollar surged on the back of strong GDP data that stuck it to those doomsday merchants.
- But the share market lost some momentum after this good data made a rate cut seem less likely.
The week ahead
Australia
- Monday June 6 – Inflation gauge (May)
- Monday June 6 – Job advertisements (May)
- Tuesday June 7 – Reserve Bank Board meeting
- Tuesday June 7 – Weekly consumer confidence
- Wednesday June 8 – Housing finance (April)
- Friday June 10 – Lending finance (April)
Overseas
- Monday June 6 – Speech by Federal Reserve chair
- Tuesday June 7 – US Productivity (March quarter)
- Wednesday June 8 – US JOLTS job openings (April)
- Wednesday June 8 – China International trade (May)
- Thursday June 9 – China inflation (May)
- Thursday June 9 – US Wholesale sales (April)
- Friday June 10 – US Consumer sentiment (June)
- Friday June 10 – US Federal budget (May)
Calls of the week
- HNA Aviation decided to take a 13% stake in Virgin Australia – but Paul Rickard says the industry is flying into headwinds. Read his take here [14].
- Liberal MPs have said supporters made the call to not donate to the Coalition’s election campaign because of the proposed super changes. But if they do get through, and you’re fired up about it, here are some asset splitting strategies to help you manage your super [11] going forward.
- In this week’s Switzer Super Report, Charlie Aitken said he believes Washington H Soul Pattinson (SOL) is Australia’s Berkshire Hathaway [9].
- And I think my call that banks are still a buy [5] is worthy of being on this list – you just have to make sure you do it right!
Food for thought
“Successful and unsuccessful people do not vary greatly in their abilities. They vary in their desires to reach their potential.”
John Maxwell, US author and speaker
Last week’s TV roundup
- Why has the stock market lost ground since the good economic news? AMP Capital’s Shane Oliver shares his views [15].
- Virgin Australia’s John Borghetti joins Super TV [16] to discuss what its new shareholder, HNA Aviation Group, means for the company and the bottom line.
- This week [17] our expert chartist, Gary Stone, gives us a technical look at shares for the month of June.
- And does George Boubouras of Contango Asset Management believe in the big four as much as yours truly? He joins the show [18] to discuss if the banks are a good buy at these levels.
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 also shows how this has changed compared to the week before.
This week one of the biggest movers was Select Harvests. Its short position increased 0.77 percentage points to 8.35%. Metcash went the other way, with its short position decreasing 0.90 percentage points to 14.45%.
[19]
Source: ASIC
My favourite charts
Services exports soar
[20]Australia’s export of services rose 1.6% in April to a record $6,342 million, and annual growth stands at a 15-year high of 18.9%
Don’t listen to the doomsday merchants
[21]Source: AMP Capital
March quarter GDP growth came in better than expected at 1.1% quarter-on-quarter and 3.1% year-on-year, making those doomsday merchants look more and more like monkeys!
Top 5 most clicked on stories
- Charlie Aitken – Australia’s Berkshire Hathaway [9]
- Peter Switzer – Banks are a great investment but do it right! [5]
- Charlie Aitken – Pick your dividend targets for the pullback [22]
- Paul Rickard – The yield chase [6]
- Rudi Filapek-Vandyck – Buy, Sell, Hold – what the brokers say [12]
Recent Switzer Super Reports
- Thursday 2 June: Growing economy [23]
- Monday 30 May: Dividend hunters [24]
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.