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Wall Street was responsible for a big U-turn overnight and, after being down nearly 260 points, the Dow Jones index rallied up over 100 points, making it one of the biggest one-day recoveries since 2011. The weird thing about it was that it came after some bad news for US jobs in the month of September.
Economists were expecting 203,000 jobs but only 142,000 showed up. Unemployment stayed at a good 5.1% but this was because the participation rate (i.e. people actively looking for work) slumped.
I wouldn’t have expected a positive finish but these are volatile times.
On the subject of not seeing things and interesting market reactions, I didn’t see Glencore coming – who did? I tipped that the Investec analyst’s note would be pooh poohed and stocks would bounce back but I didn’t think our market would finish up about 0.2% for the week.
As I said, these are volatile times for stocks and we’re stuck with these ups and downs until we get certainty. Hopefully, it will come and it will be positive.
However, I can see other reasons for stocks easily giving into gravity. Try these:
- The data-dependent Federal Reserve is seeing softer economic data at the moment but it could be a temporary breather, as the last growth number the US got was 3.9%!
- US company earnings haven’t been great so the next few weeks of reporting will answer a lot of “where are stocks going?” questions.
- China’s growth is weaker than expected so global growth isn’t as good as expected. This explains why the IMF’s Christine Lagarde is warning the Fed to slow up on the first rate rise, which can’t make stock players excited about buying stocks, unless the prices are at good levels. We saw some of that on Wall Street overnight.
- The actual ‘will it or won’t it?’ raise rates debate is also adding to anxiety and creates opportunities for short sellers, hedge fund managers, etc., who love volatile market opportunities.
- Then there’s good old Vladimir Putin and Russia rolling into Syria and the West is standing by, wondering if it should boo or cheer. I might disappoint those out there who think I’m eternally optimistic but the economist in me sees slower than expected data, which I’ll list in my “What I didn’t like” section below. This could delay a Fed rate rise and that could actually push up stocks, as we saw overnight on the New York Stock Exchange.
Don’t forget I have long argued that we’re in a slow, long grind higher economic situation and economies never grow in straight lines. If the greenback hadn’t gone higher and China had kept growing at 7%, then the Yanks would be going gangbusters. Rates would be rising and we’d be closer to the next market crash that could have happened before Europe had a chance to grow faster, thanks to Mario Draghi’s QE program.
What we saw this week from the Glencore sell off and rebound (down 29% in one day, up 17% the next and it was up 4% overnight!) to a bad jobs report, where the Dow does a 350 point turnaround is what volatile markets are all about so get used to it!
Then how do you look at playing stocks? The answer is, rationally. This year, the ASX 200 is down 3.8% but, with dividends, we’re down 0.8% to the end of September. There’s a reasonable chance that a Santa Claus rally happens and we’re also a good chance to make better money than term deposits or bond funds.
So ‘man up’ and stop whinging – we’re in a slow economic cycle but we’re not in a recession and we have a chance of some good news around the corner.
What I liked
- The Wall Street bounce on a bad jobs report, which says that market players will still buy stocks if rates stay low because they’re not giving up on the US recovery – it’s just slower than we thought. They still created 143,000 jobs in one month!
- China did throw a few stimulus trinkets at its economy, which I list below – it’s a start but they/we need more.
- Locally, retail sales rose by 0.4% in August, in line with expectations. Sales are up 4.5% on a year ago.
- New home sales here rose by 2.3% in August.
- The Performance of Manufacturing index rose by 0.4 points to 52.1 in September. A reading above 50 indicates that the sector is expanding and this is the third rise in a row and shows the lower dollar is helping.
- Job vacancies here rose by 2.7% to 160,900 in the three months to August – the highest result in almost three years. Job vacancies are up 10.2% on a year ago.
What I didn’t like
- Chinese manufacturing contracted for the second month in row.
- Euro zone manufacturing growth slowed to 52 in September from 52.3 in August.
- 32,500 workers are to go at Hewlett-Packard.
- US companies are tipped to post a 4% drop in third-quarter profits.
- A Fed rate rise is starting to look less likely this year, unless economic data picks up, with futures markets saying an October rise is a 14% chance. A rise in December is a 41% chance, January is 50%.
- The Institute for Supply Management covering manufacturing in the US was a low 50.2 and just avoiding contraction!
- There was a 43% jump in layoffs in the US.
- US growth was 0.6% in the first quarter, 3.9% in the second and now Barclays tips 1.5% for the third quarter.
- Goldman Sachs cut its end of year target for the S&P 500 from 2,100 to 2000.
- The American Association of Individual Investors’ weekly survey slid to a six-week low of 28.1% and CNBC says “in the process setting a record by registering below the average of 39 percent for 30 straight weeks!” (This can be a contrarian positive sign – sometimes it’s darkest before the dawn.)
My take on all this?
The overseas economic outlook is weaker than expected but locally things are looking better. A low dollar is proving a nice stimulus for our economy and I like this odd indicator from CommSec’s Craig James: “Data released late last week showed that the proportion of occupied seats on domestic airlines in July was at a 9-month high, with the smoothed measure at a 17-month high. The cost of the cheaper airfares (“best discount”, as opposed to business and full economy fares) is also rising. Over time, there has been a close relationship between economic growth and changes in airline load factors.”
So get flying!
Top stocks – how they fared
The week in review
- I told you why I’m not afraid [1] of all the negativity out there and gave you my personal investment plan for when the market takes a clobbering.
- Paul Rickard told you how to diversify outside of the top 20, [2] which have come under pressure in the recent rout. One way to do this is through a managed fund, like Investors Mutual’s Future Leaders Fund.
- Roger Montgomery discussed News Corp and REA’s takeover offer via a joint venture [3] for US-based online real estate business Move.
- Charlie Aitken said that in these markets, you’re best served by turning off your smart phone and buying the dips on down days. [4]
- This week’s Professional Pick – Aconex [5] – came from Brendan Warton, analyst at Platypus Asset Management. He likes this collaboration software program provider because it has plenty of upside potential and limited downside risk.
- On Monday, the brokers upgraded Iluka Resources and Myer [6], and downgraded Arrium. Our second broker report was dominated by downgrades, but OceanaGold [7] was one of the few that got an upgrade
- Penny Pryor gave us the rundown on some bashed up blue chips [8] – Woolworths and BHP. The consensus on Woolies is to wait and see who the new CEO is before you buy in, but I’d be looking at buying BHP if I didn’t already have enough of it!
- Tony Negline gave you six ways to keep on top of your super contributions [9] and avoid super penalties.
What moved the market
- A negative analyst note from Investec Securities in London, which said the Swiss-Based miner, Glencore, equity value could be wiped out if commodities remain at these levels.
- Concerns about China’s economy after poor industrial profits were reported, dropping 8.8% in August from one year ago.
- However manufacturing data for China was better than expected, rising to 49.8 in September, from 49.7 in August.
- Wall Street’s positive lead of 200,000 new private sector jobs in September.
The week ahead
Australia
- Monday October 5 – Inflation gauge (September)
- Monday October 5 – Job advertisements (September)
- Tuesday October 6 – Weekly consumer sentiment
- Tuesday October 6 – International trade (August)
- Thursday October 1 – Monthly home prices (September)
- Tuesday October 6 – Reserve Bank Board meeting
- Tuesday October 6 – Tourist arrivals (August)
- Wednesday October 7 – HIA new home sales (August)
- Friday October 9 – Housing finance (August)
Overseas
- Monday October 5 – US ISM Services index (September)
- Tuesday October 6 – US Trade balance (August)
- Wednesday October 7 – US Consumer credit (August)
- Thursday October 8 – US Federal Reserve minutes
- Friday October 9 – US Import price index (September)
- Friday October 9 – US Wholesale inventories (August)
Calls of the week
- In a return call of the week, mining giant Glencore said it was “operationally and financially robust’’ after brokerage Investec questioned its future on Monday if commodity prices fail to recover.
- Prime Minister Malcolm Turnbull called a snap summit of business, community and union leaders in Canberra to discuss major economic reform.
- The ANZ board announced that the current CEO Mike Smith will be stepping down and replaced by the current CFO, Shayne Elliott, on 1 January 2016. David Jones also announced CEO Iain Nairn would be stepping down for personal reasons, to be replaced by John Dixon in January.
- The AFL website mistakenly put up a souvenir jersey celebrating Sam Mitchell’s win of the Brownlow Medal before the vote had been counted! Unlucky for them, the winner was Fremantle star Nat Fyfe! Does this remind anyone of the infamous “Dewey Defeats Truman’’ headline on the front page of the Chicago Daily Tribune?
- And Tony Featherstone said that Retail Food Group has fallen too far and is a buying opportunity.
Food for thought
Price is what you pay. Value is what you get.
Warren Buffett – American business magnate and investor.
Last week’s TV roundup
- In this Super Session [10] we talk about a great super strategy and a “no-brainer” for many people over 55 – the transition to retirement pension.
- Jon Howie of iShares joins the show to talk about one of the fastest growing sections of the stock market [11], Exchange Traded Funds.
- Chief economist at Betashares, David Bassanese, talks about current market volatility [12] and how worried we should be.
- And head of equities at Aberdeen Asset Management, Robert Penaloza, explains how he’s investing at the moment. [13]
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 AWE, with a 4.60 percentage point increase in the proportion of its shares sold short, to 14.44%.
[14]
My favourite charts
Glencore’s gore and roar
[15]
Glenore’s balance sheet Armageddon is illustrated by the chart above (Glen: L), which shows how the mining giant slumped after some unknown smarty pants Investec analyst shared his opinion, and then bounced back from this complete market overreaction! That being said, this chart is just a snapshot of the past week – the price has dropped over 60% since the start of 2015!
Manufacturing a better economy
[16]
The performance of manufacturing index rose by 0.4 points to 52.1 in September. Any number over 50 means the sector is expanding.
Top 5 most clicked on stories
- Peter Switzer: I’m not afraid and this is how I’m investing [1]
- Paul Rickard: Investing outside the top 20 [17]
- Charlie Aitken: Take it easy and buy the dips on down days [4]
- Penny Pryor: Super Stock Selectors – CBA, Premier Investments and Select Harvests [18]
- Roger Montgomery: Is REA Moving in the right direction? [3]
Recent Switzer Super Reports
- Thursday, 1 October, 2015: The Fun Police [19]
- Monday, 28 September, 2015: Second time lucky [20]
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.