Switzer on Saturday

Forget economic stats. I’m fixated on virus data.

Founder and Publisher of the Switzer Report
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Despite a shocking (though expected) jobs report in the US overnight, the Dow Jones Industrial Average was not overreacting to the downside. The key index was down but the lower volatility for the stock market is a plus that I hope can be sustained. At the close, the Dow was down 360 points or 1.69%.

Clearly I have to start with this because it’s news overnight and is a number that once was thought impossible. But these are extraordinary times and that’s why the US saw the loss of 701,000 jobs in March. Note no exclamation mark was put in because you had to expect a closure of the economy would do that. In fact, next month’s number should be bigger!

However, watching economic data is pointless right now – it’s bound to be bad! I’m watching two things – virus data and what ‘home-imprisoned economists and market experts’ are seeing to give me a feeling for when the stock market beats gravity and heads skywards.

If Europe and the USA can see their infection and death rates peak and their respective curves’ slopes fall and turn from rising to falling, then this bear market can be beaten. When that happens is anyone’s guess. History is not a reliable guide because we’ve never had to deal with an economic shutdown like this. Wars have changed the flow of resources from peace-time production to war-time production but people went to work.

Seeing the key curves flatten and then fall will help stocks head higher but when it looks likely that we can escape our homes and go back to work, that’s when the stock market will gamble more on the future profits of the companies listed in the S&P/ASX 200 Index.

Let me share with you all the good news I can glean from the experts I watch. I won’t do the bad because you can get that everywhere! That said, I will give you some cautionary market observations before I finish up.

To the good news and Chris Joye from the AFR and Coolabah Capital Investments, who has his money markets research team watching infection rates worldwide, predicted we’d see our curve peak and flatten between April 4-11. That looks to be happening. I spoke to Chris on Thursday and he said it is happening “at a good rate”. And despite the bad-looking news out of the US, he’s confident that we’ll see much better news by the last week in April! That would be huge.

On Australia, this is what AMP Capital’s Shane Oliver observed on Friday: “Spain and Switzerland now have more cases per head of population than Italy,” he wrote. “Cases per million people are rising rapidly in Germany, France, the US and UK but Australia may be joining Korea, Singapore, China and Japan in being more successful in stabilising the number of cases.”

Source: PRC National Health Commission, Bloomberg, AMP Capital

And the chart below underlines how our virus numbers are promising.

Another positive worth watching is the fact that “…Europe is showing signs of stabilising.” It’s early days but I’ll take any positive right now.

He also noted some good signs in Italy and Spain. “Italy has now seen the number of new cases trend down for nearly two weeks adding to confidence that its lock down from 9th March may be working,” he wrote. “Out of interest it may be following a similar pattern to China with a rough lag of 11 to 21 days between the lockdown and the peak in new cases (depending on how the peak is defined). Following the Chinese experience, some relaxation of the Italian lockdown may be possible later this month. Spain also appears to have stabilised the number of new cases over the last week.”

I know many of us doubt any numbers out of China but Shane has looked at other indicators and it looks believable that the world’s second biggest economy is getting back to work, which hopefully will be a path the rest of the world can follow after a successful lockdown period. Shane has reported the following that raises hopes that China is doing what we all want, that is, making an economic comeback! This is what he revealed:

  • Daily activity indicators for traffic congestion – a plus.
  • Subway use – a plus.
  • Coal demand at power stations – a plus.
  • Property sales continuing to trend up – a plus.
  • China’s PMI’s rebounded to around normal levels in March – a plus.
  • Korean exports picked up in March, suggesting Chinese demand drove it – a plus.

This market madness will only approach a more sane attitude when we can see the light at the end of this economic closure tunnel, which says businesses will soon open and people will go back to work. If China can do that without a second wave of infections, then we’ll all get out of jail! It looks like a longshot right now but genuinely, who really knows? This whole pandemic is guesswork on steroids!

The St. George economics team has had a shot at guessing our future and here’s what their chief economist, Besa Deda has come up with:

  • We’re anticipating three consecutive quarters of falls in Australian GDP over the March quarter to the September quarter of 2020, before a recovery begins in the December quarter.
  • In making these forecasts, we’re assuming that infections peak around the middle of this year – this is a very fluid forecast. There is a risk the peak in infections could come later and there’s a risk of second and subsequent waves of COVID-19, including potential mutations to the virus during these additional waves.
  • We expect GDP to show contractions of 0.7% in Q1, 8.5% in Q2 and 0.6% in Q3. A lift in GDP of 5.2% for Q4 is expected.
  • Through 2020, we expect the economy to contract by 5%.

The broker/fund manager’s view

Morgan’s Ray Chan attended WAM’s investor Q&A this week (of course, starring Geoff Wilson) and here’s Ray’s main points:

  • He trimmed down retail/mining services/illiquid stocks at an earlier stage of the stock market sell off.
  • Cash holdings are now at 38%. Geoff did a bit of trading in the month of March.
  • Geoff has been buying Cleanaway (CWY), IPH and the telecom TPG (TPM) in March.
  • He observes strange market behaviour every day at 3pm. If we see market moves up at 3pm, then it’s usually followed by strong buying and vice versa.
  • The lower Aussie dollar is a shock absorber for our economy (and our stock market).
  • A low dollar will be a plus for the local index.
  • He expects dividend cuts across Australian corporations – companies are now in survival/ protection mode. Dividend cuts coming was a guess of 20% to 30%.
  • Geoff suggests we need to understand that a bear market could go on more than one month. We could be incredibly lucky if we have seen the lows. “Who knows where the bottom is?” He believes this bear market needs time to find a bottom. Back in the GFC, the Dow had two 20% rallies and in the tech sell off, there’s also two 20% rallies. The Yanks, to date, have had one.

The local story this week saw the S&P/ASX 200 Index close 225 points (or 4.65%) higher at 5067.5 for the week. This was a nice sign that the stimulus and the virus data have put a floor under the stock market drops, at least for now.

By the way, the 1.7% fall of the Index was linked to the jobless claims number in the US, with 6.6 million Americans filing for unemployment relief.

The AFR claims the spike in stocks early in the week was linked to President Trump saying the US virus numbers would peak in two weeks. This call is largely being questioned and won’t help stocks next week but Chris Joye’s best guess says we could see good US news by the last week in April. If that works out, the stock market reaction should be positive.

Did I say earlier that economic data is irrelevant compared to virus data!

The big news locally was the oil price spike and the likes of Woodside put on 16.75%, Santos 16.9% and Beach put on 21.1%.

Harvey Norman said it would kill the interim dividend, while Crown was deferring a dividend for two weeks and was killing the franking credits that were supposed to come with it. Prepare for these sorts of decisions – bear markets and recessions can do this.

Other winners this week were G8 Education up 50%, Ansell 25.85% higher and Hub24 some 23% higher. Losers were predictable – Flight Centre down 49.46% and Webjet off 27.9%.

The focus on the bad ignores the good

This view on what’s going on right now can be misleading and the following from an expert on CNBC is worth thinking about.  “This still feels like something we’re heading into, not heading out of,” said Brian Nick, chief investment strategist at Nuveen. “We can see the light behind us, but not ahead of us. The upside scenario is disappearing very quickly and the base case is getting worse.”

I can see why someone would say that now but this ignores what has happened and what might influence the future. That’s what I’m more interested in, because the now is CRAP!

Take this in from Shane Oliver: “There have now been more than 270 stimulus announcements around the world. Central banks and governments appear to remain committed to doing “whatever it takes” to limit the economic impact on the economy and ensure a decent recovery (although a laggard remains the EU, where a joint response to fiscal support is lacking leaving the ECB to fill the void). The next chart shows our estimate of global fiscal stimulus as a share of GDP for this year. If currently proposed measures are allowed for, it’s going to be nearly 4% of global GDP and far greater than that seen in the GFC.”

Source: IMF, AMP Capital

My conclusion? If the virus data improves (surprising the doomsday merchants) and this total stimulus kicks in, then being exposed to the stock market in coming months makes perfect sense. Expect some more down days but if those virus numbers head in the right direction, this could be a shortish bear market. 

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia

Monday April 6 – ANZ job advertisements (March)
Monday April 6 –  Melbourne Institute inflation gauge (March)
Tuesday April 7 –  Weekly consumer sentiment (April 5)
Tuesday April 7 – Reserve Bank Board meeting
Tuesday April 7 –  Trade balance (February)
Tuesday April 7 –  AiGroup Performance of Services (March)
Wednesday April 8 – Lending (February)
Thursday April 9 – Financial Stability Review

Overseas

Monday April 6 – US Consumer inflation expectations (March)
Tuesday April 7 – US IBD/TIPP economic optimism (April)
Tuesday April 7 – US JOLTS job openings (February)
Wednesday April 8 – US Federal Reserve meeting minutes
Thursday April 9 – US Producer price index (March)
Thursday April 9 – US Consumer sentiment (April)
Friday April 10 – US Consumer Price Index (March)
Friday April 10 – China inflation (March)

Food for thought:

“Financial crisis is the moment of truth for real collectors and true artists.” – Victor Pinchuk

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:

Source: ABS, AMP Capital

Top 5 most clicked:

Recent Switzer Reports:

Monday 30 March: When is it wise to start buying?

Thursday 02 April: What the hell just happened? And what could happen next?

 

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.