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Great growth numbers should underpin better stock prices

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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

What I didn’t like

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 [1]. If you’re a parent or grandparent, you might find the story inspirational for your leadership [1].

The Week in Review:
Top Stocks – how they fared:                                         

What moved the market?
Calls of the week:
The Week Ahead:

Australia

Overseas

Food for thought:

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

(email subscriber@switzer.com.au [13] 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? [2] – Peter Switzer
  2. Buy, Hold, Sell – what the brokers say [8] – Rudi Filapek-Vandyck
  3. 5 A-REITs to consider post the Westfield takeover [6] – James Dunn
  4. Forget banks, AMP and Telstra, consider Aristocrat Leisure and Kidman Resources [14] – Charlie Aitken
  5. Is Transurban another expensive yield trap? [5] – Charlie Aitken
Recent Switzer Super Reports:

Monday 4th June: Risk or reward [15]

Thursday 7th June: Yield and ethics [16]

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.