We’ve had a shocker on the stock market this week, with the AFR telling us we’ve lost $54 billion in market cap off our top 200 Aussie companies. I know it felt bad but the final score was a 191-point loss on the S&P/ASX 200 index, which means we copped a 3.2% sell off and I want to know on what?
Seriously, after a great week of economic data on jobs, wages, consumer confidence, business conditions and even petrol prices, you’d think we could’ve had a reasonable tale to tell. But no, and I blame overseas issues, with Donald Trump’s trade war drama topping the list.
Back in October, a record 85% of fund managers in the Bank of America survey, thought the global economy is late in the cycle, which was 11 percentage points above the previous high in December 2007. And this week the survey said 35% rate the trade issue as the biggest negative for fund managers.
And we know Trump and China are important because on Friday, our time, we saw shares lift from lows after the Financial Times reported that US Trade Representative, Robert Lighthizer, told industry executives that the next round of tariffs on Chinese imports has been put on hold. At the close of trade, the Dow Jones was up by 209 points (or 0.8%), after tracking a 567-point range. The S&P500 index was up by 1.1% and the Nasdaq index was higher by 123 points (or 1.7%).
And on Tuesday, the Dow and S&P500 indexes lifted by more than 100 points in early trading, after White House economic advisor, Larry Kudlow, confirmed reports of renewed US-China trade talks.
These market reactions to a sniff of a possible trade deal – Trump re China – shows that if we’re hoping for a Santa Claus rally, we better hope Donald is donning the red suit and the long white beard!
Compounding the trade negativity was the inexplicable big fall in the oil price and the set against tech stocks but Apple’s story this week partly explains the US market’s problem with gravity. Guggenheim Partners downgraded Apple (-2.8%) citing concerns about a slowdown in iPhone sales, which followed news earlier in the week that two suppliers to Apple cut forecasts for iPhone sales and these gadgets everyone seems to have are now seen as a new age economic indicator!
On top of this US problem was bad news out of the EU, with Italy and the UK’s Brexit problems and China came up with weaker-than-expected economic numbers. Fortunately, China responded as only China would and could. This is how CommSec’s Craig James saw it: “It’s back to the future in China if today’s monthly economic activity data is any guide,” he wrote. “The industrial sector was fired-up again by policymakers with announced stimulus boosting output and investment. Infrastructure spending lifted to 3.7 per cent over the 10 months to October, up from 3.3 per cent over the nine months to September. And government spending rose by 8.2 per cent in October from a year earlier.”
But it was not all overseas issues, with Westpac down 8.8% to $25.27, ANZ dropped 6.5% to close at $25.36, NAB was down 4.5% to $23.77 and the Commonwealth Bank was off 2.9% to $68.90. I blame the black cloud of the Royal Commission and what the Government and Bill Shorten will promise to do to them ahead of a May election next year.
God, it’s complicated!
Seriously, if the overseas problems were not as pervasive and the Royal Commission was done and dusted, the economy would be a great driver of stock prices but alas the real world and the market’s perception of it, prevails. Bloody real world!
What I liked
- This CommSec headline: “NSW & Victorian jobless rates at decade lows.”
- Gross State Product(GSP) figures for 2017/18 have been released. The ACT grew by 4% over the year, ahead of Victoria (3.5%); Queensland (3.4%); Tasmania (3.3%); NSW (2.6%); South Australia (2%); Western Australia (1.9%) and the Northern Territory (up 1.7%).
- Employment rose by 32,800 in October, after a revised 7,800 increase in jobs in September (previously reported as a 5,600 increase in jobs). Full-time jobs rose by 42,300, but part-time jobs fell by 9,500. Economists had tipped an increase in total jobs of around 20,000.
- Unemployment was steady at a 6-year low 5% in October. In trend terms, the jobless rate fell from 5.2% to 5.1%. In original terms, the jobless rate in October was 4.77% – the lowest rate in almost eight years (December 2010).
- The wage price index rose by 0.6% in the September quarter, following a downwardly-revised 0.5% increase (previously +0.6%) in the June quarter. To 2-decimal points, annual wage growth lifted from 2.14% to a 3½-year high of 2.29%.
- The Westpac/Melbourne Institute survey of consumer sentiment index rose by 2.8% to a reading of 104.3 in November. The sentiment index is above its long-term average of 101.5. A reading above 100 denotes optimism.
- Consumers’ views on whether it was a good ‘time to buy a dwelling’ rose by 11.8% to a 3½-year high of 114.8 and is up 16.7% over the year to November. And consumers in Sydney showed a strong gain of 37% to 131.9 in November, up from 96.3 in October – the strongest level in 5 years.
- The ANZ-Roy Morgan consumer confidence rating rose by 2.6% to 119.8 in the past week. The index equals a 4-month high and is above both the average of 114.2 held since 2014 and the longer-term average of 113 held since 1990.
- The NAB business conditions index eased from +14 points to +12 points in October but the long-term average is 6!
- According to the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 6.7 cents a litre last week to 149.4 cents a litre – the biggest weekly fall since the week ended 30 November 2008 (down 7.0 cents a litre).
- The average credit card balance rose by $3.23 to $3,221.05 in September, up from $3,217.82 in August, which confirms the positive consumer confidence readings.
- The US headline consumer price index rose 0.3% (consensus: +0.3%) to 2.5% over the year to October, which is OK and should keep the Fed from being too aggressive with rate rises.
- US retail sales rose by 0.8% in October (forecast +0.5%).
What I didn’t like
- According to NAB, business confidence locally fell from +6 points to +4 points and the long-term average is 5.8.
- The Philadelphia Federal Reserve index eased from +22.2 to +12.9 in November.
- Brexit drama: A number of government cabinet ministers resigned over the proposed Brexit deal and shares in RBS fell 9.6%, as financial stocks fell in response to the uncertainty on the Brexit deal.
- Italy’s decision to stick to its growth and deficit plans in its re-submitted draft budget set the stage for a showdown with the EU over breaking structural deficit limits. And stocks didn’t like it!
- Chinese economic data was worse than expected. “China’s annual economic (GDP) growth rate decelerated to 9½-year lows of 6.5% in the September quarter as the government struggles to rebalance the economy and achieve its year-end annual growth target. On one hand, reigning-in China’s huge debt load through de-leveraging is a priority. But on the other hand, economic activity is slowing as the economy matures and pivots more inwardly towards the consumer. And US tariffs threaten to eventually weigh on output further, despite recent front-loading of goods by US importers.” (CommSec)
- The US government budget deficit rose to US$100bn (survey: -US$100bn) in October, up from -US$63bn in October 2017.
I believe in Santa Claus
Yep, the history of Santa Claus rallies makes me believe in Santa, when it comes to stocks. However, this year, Presidents Trump and Xi have to pull a trade rabbit out of the hat or else we’ll end the year in negative territory. A Santa Claus rally is a rise in stock prices in the month of December, generally seen over the final week of trading prior to the new year. The Santa Claus rally is also known as the “December Effect” and was first recorded by Yale Hirsch in his Stock Traders Almanac in 1972.
Business Insider has looked at the history and this is what it found: “According to the 2015 Stock Trader’s Almanac, since 1969 the Santa Claus rally has yielded positive returns in 34 of the past 44 holiday seasons – the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.6%, and returns are positive in each of the nine days of the rally, on average. Nevertheless, each year there is at least one day of declines.
Alternative research over a longer period confirms the persistence of these trends: According to historical data going back to 1896, the Dow Jones Industrial Average has gained an average of 1.7% during this seven-day trading period, rising 77% of the time.”
On the law of averages, you can see why I believe in Santa!
The Week in Review:
- I looked at the possible coming of Bill Shorten as PM and how it would force many investors and retirees to think outside the square to protect their investments [1] and the income that flows from them.
- Paul Rickard [2] wrote that BHP’s off-market share buyback will be an easy and welcomed decision for some shareholders, but for others, not so.
- With the market hammered by a nasty October, James Dunn [3] put forward 4 stocks under $1 that look to be offering decent value.
- Tony Featherstone [4] suggested two undervalued car stocks for experienced investors to check out.
- What if you have one SMSF but want separate investment allocations and have different investment strategies in the one fund? Can you do it? Graeme Colley [5] has the answer.
- In the first edition of Buy, Hold, Sell – what the brokers say [6] for the week, stockbrokers issues 26 upgrades, while in the second edition, [7] there were four upgrades and five downgrades, with Lendlease falling into both camps.
- Australian Ethical Investment Equities Analyst Deana Mitchell selected Equity Trustees as the Stock of the Week [8].
- Our Hot Stocks [9] for the week were Lovisa and Collins Food.
- In Questions of the Week [10], we responded to reader queries about the ETF, HACK, the BHP and RIO buybacks, WAM and financial advisor fees.
- I asked Shawn Burns, who manages the Switzer Dividend Growth Fund (or SWTZ) and Contango Income Generator (or CIE), the questions I suspect many of you would like answers to [11].
Top Stocks – how they fared:
What moved the market?
- Wobbles on Wall Street, most notably affected by ongoing trade tension and a dive in Apple shares
- Oil prices plunged to their lowest levels in months
Calls of the week:
- Shawn Burns [11] said he thinks market volatility is here to stay and that investors need to adjust their mindsets.
- Paul Rickard [2] said the BHP buyback is a no-brainer for low rate or zero rate taxpayers
- Everyone that has already claimed their free tickets to the Switzer Income Conference later this month. Haven’t got yours? To claim your complimentary tickets, simply click here [12], choose the event you’d like to attend and enter the promotional code ‘SSR’ before checking out with your ticket.
The Week Ahead:
Australia
Monday November 19 – CommSec Home Size Trends Report (2017/18)
Monday November 19 – Overseas arrivals and departures (September)
Tuesday November 20 – CBA Business Sales Indicator (October)
Tuesday November 20 – Reserve Bank Board meeting minutes
Tuesday November 20 – Reserve Bank Governor Lowe speech
Tuesday November 20 – National accounts (2003/04 to 2017/18)
Wednesday November 21 – Skilled internet job vacancies (October)
Thursday November 22 – Population projections (2017-2066)
Friday November 23 – ‘Flash’ CBA purchasing managers’ indexes (November)
Overseas
Monday November 19 – US NAHB Housing Market Index (November)
Tuesday November 20 – US Housing Starts (October)
Tuesday November 20 – US Building permits (October)
Wednesday November 21 – US Durable goods orders (October)
Wednesday November 21 – US Existing home sales (October)
Wednesday November 21 – US Conference Board leading index (October)
Thursday November 22 – US Public holiday (markets closed)
Friday November 23 – ‘Flash’ Markit purchasing managers’ indexes (November)
Food for thought:
“I don’t have inspiration. I only have ideas. Ideas and deadlines.”
– Stan Lee
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 from AMP Capital tracks Australian petrol prices alongside oil prices:
Source: Bloomberg, AMP Capital
Top 5 most clicked:
- My ‘outside the square’ ideas for protecting your investments! [1] – Peter Switzer
- BHP’s buyback a “no brainer” for some shareholders [2] – Paul Rickard
- Crash or correction? How is this fund manager playing stocks? [11] – Peter Switzer
- 4 stocks under $1 [3] – James Dunn
- Buy, Hold, Sell — What the Brokers Say [6] – Rudi Filapek-Vandyck
Recent Switzer Reports:
Monday 12 November: My outside the square investment ideas… [13]
Thursday 15 November: Crash or correction? [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.