At long last our market saw a rise for the week – the first in a month. However it was only a 0.9% gain (or nearly 55 points) but with the run of great economic data that surfaced, we should’ve moved a lot higher. However, the reality is that the Royal Commission is still acting as a drag and any new banking balls up or cases of bad behaviour are holding back what I think will be an inevitable rebound.

Everything from economic growth to job ads to record profits to solid trade and retail numbers all said profits will soon start to reflect this 3.1% growing economy. And once the Royal Commission is over, stocks prices should pick up some pace (look closely at the data in my “What I liked” section and tell me you can’t see an improving economy)!

Even the Reserve Bank agrees: “The expectation is that Australian economic growth will lift to 3 per cent and eventually this will lead to higher wages, prices and interest rates,” it said in its statement, following another Tuesday where the cash rate remained unchanged.

It actually had happened in the March quarter but we only found out on Wednesday, which was one day before the RBA made its prediction.

For those who don’t want to believe in good news and fear that the housing market might ruin the great economic tidings, this is what the RBA said on the subject: “While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline,” which led CommSec’s Craig James to observe: “In short, interest rates are low enough to support the housing market.”

On worrying external developments, the big Bank “made reference to the political scene in Italy and Spain and weakness in some emerging market economies, but it wasn’t enough to change its broader thinking.”

Interestingly, CommSec has looked at these good local figures this week and tipped the first interest rate rise would be in early 2019, which is at odds with many economists, who before this week, had the first rise in late 2019 and even 2020! If economists start bringing forward their first rate rise calls, it will be good news for stock prices, as it means their take on the economic recovery will be on the improve.

To share news worth noting, Morgan Stanley gave Xero the thumbs up and MYOB the thumbs down when it comes to the accounting software future. The former’s share price hit an all-time high of $43.99, after rising 7.6% for the week. (The Age)

Afterpay Touch and Appen are two stocks on the rise and will soon be included in the S&P/ASX 200 Index, which means some fund managers will have to buy these stocks. The former spiked 8.6% for the week, while the latter whacked on 12.7%.

The big loser again is Retail Food Group, which has seen its franchisee woes kill its market cap so it will fall out of the S&P/ASX 200 Index.

Stocks with bad market vibes this week include AMP and Wesfarmers.

Earlier in the week, I interviewed Morgan’s chief economist, Michael Knox, who said he was a believer in the “our economy will grow better than 3%” story, supported by the RBA, Treasury and yours truly – as if you didn’t know! He also said he had fair value for the S&P/ASX 200 Index at 6170 but he quickly added that the market nearly always outperforms this mark. Given the local economic data this week and where the Index finished on Friday, that’s a 2% gain as a minimum, even if the market doesn’t overreact too positively.

With all this local economic positivity, if the Royal Commission can just cool it with the banks and President Trump can take the heat out of his trade rhetoric, then maybe we can have a damn nice run for local stocks ahead of the September reporting season, where I anticipate better-than-expected results.

Unfortunately, the G7 meeting kicks off this weekend and six of the seven currently aren’t too happy with Donald. This won’t help Wall Street. You can only hope the ‘Art of the Deal’ guy has a trump card up his sleeve to turn his tariff threats into a win for all! (Pun intended and I like it!)

If this meeting turns ugly, Wall Street could have short-term convulsions and our local good news story won’t be enough to resist us playing follow the leader. That said, the Dow was up this week and it was its best rise in three months. I hope Donald doesn’t ruin this good omen at his G7 get together in Quebec this weekend.

What I liked

• The record economic expansion of our economy is well into its 27th year. The Australian economy grew by 1% in the March quarter after growing by an upwardly-revised 0.5% (previously 0.4%) in the December quarter – the equal best quarterly growth rate since December 2011.
• Annual economic growth rose from 2.4% to 3.1% – the strongest growth rate in 21 months!
• Thirteen of the 19 industry sectors expanded in the March quarter.
• Real gross national income rose by 1.7% in the March quarter, to be up 2.4% on the year. In nominal terms, GDP increased by 2.2% in the quarter and rose by 3.9% over the year.
• ANZ Job Advertisements rose by 1.5% in May, after declining by a downwardly-revised 0.3% (previously -0.2%) in April. Job ads are up 11.5% on a year ago. The number of jobs advertised (seasonally adjusted) was 179,245 in May – the strongest level in seven years.
• Retail trade rose by 0.4% in April after a flat outcome in March and a 0.6% increase in February. Annual spending growth fell from 3.2% to 2.6%.
• The trade surplus fell by $754 million to $977 million in April but was still the 11^th surplus in 12 months!
• The Performance of Construction Index eased from 55.4 points in April to 54 in May but readings over 50 signify services sector expansion.
• This from the RBA: “The recent data on the Australian economy have been consistent with the Bank’s central forecast for GDP growth to pick up, to average a bit above 3 per cent in 2018 and 2019.”
• Company operating profits rose by 5.9% in the March quarter to stand 5.8% up on the year. In the year to March, profits hit a record high of $326.7 billion, up 12.3% over the year.
• The current account (the broadest measure of the trade accounts) improved in the March quarter (smaller deficit), with the deficit narrowing from $14,661 million to $10,469 million.
• The ratio of net income on foreign debt to exports of goods and services stood at 5.8% in the March quarter, the best (lowest) level in 36 years.
• The CBA Purchasing Manager’s Index (PMI) for the services sector rose from 55.2 points in April to 55.9 points in May. The Australian Industry Group (AiG) Performance of Services Index (PSI) rose from 55.2 points in April to 59 points in May – the highest level in over 13 years. Readings over 50 signify services sector expansion.
• There were reports that US officials were weighing an offer by China to import an extra US$70 billion of American goods over a year.

What I didn’t like

• The weekly ANZ/Roy Morgan consumer confidence rating fell by 1% to 116.5 but confidence is still up by 3.2% over the year and above the average of 113.8 since 2014.
• The ISM New York index fell from 64.3 to 56.4 in May. Still, a reading above 50 indicates an expansion of activity. US factory orders fell by 0.8% in April (forecast +1.7%).
• US consumer credit rose by US$9.26 billion in April, short of the expected gain of US$13.75 billion.
• US investors fretted about trade friction at this weekend’s G7 meeting.
• US productivity grew at a 0.4% annual rate in the March quarter (forecast +0.6%), while unit labour costs rose by 2.9% (forecast 2.8%).
• In Italy, “an early election has been averted but the new Government’s proposed 6% of GDP fiscal easing leaves it on a collision course with the European Commission and arguably with bond markets. It will take a while, but the problem will likely come to a head on September 20 when the Government will present its budget for evaluation.” (AMP Capital’s Shane Oliver)
• German factory orders fell for the fourth month in a row in April, highlighting the softer tone in Eurozone economic data this year – all of which is Euro negative.
• Japanese data was on the soft side, with weakness in household spending and the services PMI.
• Caterpillar’s stock price is falling after being up 70% last year. This could be because the belief in worldwide synchronized growth is waning a little. The current share price is $155 and $144 is the price that might spook serious investors who watch technical stuff.

One big dislike

The number of “What I didn’t like” developments in today’s Report is the biggest it has been in years. Of course, this isn’t a trend but I will watch this anecdotal indicator closely in coming months. Happily, the number of “What I liked” factors was also very big but many of those were local pluses. I also don’t like to know that the S&P 500 Index, the most important market index in the world, is now 25% dominated by tech stocks. If you take these stocks out of the Index, the stock price growth has been pretty underwhelming in recent times.

Donald Trump’s tariff tantrums could hurt US tech stocks and clearly the S&P 500 would be badly exposed to retaliation against tech companies. The only plus might be that many of these tech devices are made in China! That’s why we hear about China and Europe talking about putting tariffs on products such as peanut butter and motor cycles.

By the way

Last Wednesday evening I recorded one of my Money Talks programs at BT’s Barangaroo’s theatre in front of a live audience (do they ever do them in front of a dead audience?!) It was a great show and I was inspired by a Dad and a few young people who showed up on the night. This experience is the subject of my Weekend Switzer piece today. If you’re a parent or grandparent, you might find the story inspirational for your leadership.

The Week in Review:

• 5 global risks or 5 global opportunities? I take a look in my article this week.
• Growth sectors led the market higher in May, and Paul Rickard reviewed our model portfolios.
• Paul Rickard also tested the Centuria 80 Grenfell Street Fund, an unlisted property fund for an Adelaide CBD building.
• Is Transurban another expensive yield trap? The dividend is an output, not an input, and should NEVER be the sole reason you buy a stock. Charlie Aitken discussed.
• There are a number of A-REIT’s driving the market at the moment and James Dunn looked at 5 to consider post the Westfield takeover.
• Ethical investing is becoming increasingly popular, particularly among younger investors, so Tony Featherstone looked into 3 ETFs to capitalise on the ethical-investing boom.
• In the first Buy, Hold, Sell – what the brokers say, there are more downgrades than upgrades.
• And in the second Buy, Hold, Sell – what the brokers say downgrades continued to outnumber upgrades, but CYBG and Dulux Group managed to get upgraded.
• In this week’s Professional’s Pick, deputy portfolio manager at Tribeca Investment Partners, Jun Bei Liu, explains why this locally-listed UK bank is set to grow.
• This week our hot stock pickers explained why they love these two former market darlings. Find out what they are.
• Plus, Paul Rickard answered readers’ queries about a software company and the inclusion of China A shares in the MSCI index.

Top Stocks – how they fared:                                         

What moved the market?

• U.S stock markets soared with the Dow Jones back over 25,000 and the NASDAQ hitting an all-time high.
• U.S President Donald Trump announcing that the summit with Kim Jong-un was back on.
• Australian GDP. The Australian economy grew at the fastest pace in almost two years.

Calls of the week:

• Tony Featherstone listed 3 ETFs to capitalise on the ethical investing boom
• CBAs call to settle with AUSTRAC and pay a $700m fine.
• New Australian Socceroos coach has taken matters into his own hands, paying his own assistant coaches wages out of his own pocket.
• George Soros “Another GFC is coming.

The Week Ahead:

Australia

• Tuesday June 12 – NAB business survey (May)
• Tuesday June 12 – Housing finance (April)
• Tuesday June 12 – Lending finance (April)
• Wednesday June 13 – Reserve Bank Governor speech
• Wednesday June 14 – Monthly consumer confidence (June)
• Thursday June 14 – Employment/Unemployment (May)

Overseas

• Monday June 11 – China Money supply & lending (May)
• Tuesday June 12 – US Consumer prices (May)
• Tuesday June 12 – US NFIB Business Optimism Index (May)
• June 12-13 – US Interest rate decision
• Wednesday June 13 – US Producer prices (May)
• Thursday June 14 – China activity data (May)
• Thursday June 14 – US Export & import prices (April)
• Thursday June 14 – US Retail sales (May)
• Thursday June 14 – European Central Bank meeting
• Friday June 15 – China House prices (May)
• Friday June 15 – US Industrial production (May)
• Friday June 15 – US New York Fed purchasing managers (June)
• Friday June 15 – US Consumer confidence (June)

Food for thought:

If there are 3 apples and you take away 2, how many do you have?

(email subscriber@switzer.com.au your answer)

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:

Australia may be rank outsiders to make the football World Cup final, but we are global finalists when it comes to household debt. With so much debt, Australians also have high repayments, averaging 15.5 per cent of incomes, second only to the Dutch at 16.6.

Top 5 most clicked:

1. 5 global risks or 5 global opportunities? – Peter Switzer
2. Buy, Hold, Sell – what the brokers say – Rudi Filapek-Vandyck
3. 5 A-REITs to consider post the Westfield takeover – James Dunn
4. Forget banks, AMP and Telstra, consider Aristocrat Leisure and Kidman Resources – Charlie Aitken
5. Is Transurban another expensive yield trap? – Charlie Aitken

Recent Switzer Super Reports:

Monday 4^th June: Risk or reward

Thursday 7^th June: Yield and ethics

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.