By Friday this week, stock players should have more clarity about what will happen to share markets after two big events take place — one in the US and the other local. What transpires will set the scene for how you want to invest for the December quarter and at least for the first half of 2025.
Personally, I know how I want to invest but I’m at sixes and sevens about when I want to press the button on those plays. More on that after we consider what lies ahead this week.
The first big happening will be in Washington where the Federal Reserve resides and where there’s a two-day meeting on what the central bank will do with interest rates. The news will be released on Wednesday afternoon in the USA. Because of global time zones, it will affect our stock market on Thursday morning.
This collides with the local event i.e. our latest jobs report, which we see at 11.30am on that same day, which sets Thursday and Friday up for some potentially interesting market moves. This gives rise to two questions.
The first question is what is likely to happen with these ‘stock prices significant’ show-and-tells. The second question is how will stock markets respond?
These aren’t easy questions to answer but someone has to do it!
Let’s start with the Fed’s big decision. We know US inflation is falling nicely and there are some concerns that maybe growth could be slowing faster than is wanted. Until last week’s data drop, the bet was a 0.25% cut was coming, after annual inflation was reported to be at 2.5%, the lowest level since February 2021.
This is how CNBC’s Jeff Cox reported the latest on this subject: “Futures markets for most of the past week had lasered in on a quarter percentage point, or 25 basis point, rate cut. However, that turned on Friday, with traders switching to an almost even chance of a either a 25 basis point or 50 basis point reduction, according to the CME Group’s FedWatchtool.”
The inflation data guarantees a 0.25% cut but other economic data is raising the spectre of a recession threat. That’s why the likes of Claudia Sahm, chief economist for New Century Advisors, said this to CNBC: “The labor market [since] last July has gotten weaker, so there’s an aspect of just recalibrating. We got some more information. [Fed officials] need to kind of clean it up, do a 50-basis point cut and then be ready to do more”.
A bigger cut is seen as putting a floor under a potential labour market decay, but it could spook the market that the Fed has left rates too high for too long, which central banks can do. On the other hand, if Fed boss Jerome Powell sells it as an ‘insurance’ cut to ensure the soft landing for the economy is locked in, then the market could love it and buy up big time.
On the other hand, if the Fed goes for a 0.25% cut and Powell says there’s little chance of a recession, then the market might love it and keep on buying. Or then there’s the possibility that we see a “buy the rumour, sell the fact” reaction, which I think would be a great set up to buy the dip to prepare for the December quarter rebound that rolls into 2025.
By now I think you can see why I’m at sixes and sevens about when I move with my investment play for the next 9 to12 months.
Now for the local data drop — the unemployment and employment readings — that could have a big bearing on what our Reserve Bank might eventually do with interest rates.
Economists expect 20,000 jobs were created in August and for the RBA to be happy about the impact of its 13 interest rate rises, the jobless rate has to increase over the 4.2% number we saw in July. The dismal truth is that the higher unemployment goes, the closer we are to the first rate cut, with the consensus view being that it happens in early 2025, though the CBA and Westpac economics teams think a Cup Day cut is possible.
In fact, they’re punting on it with their forecasting reputations!
In recent months, economic data linked to the growth of the economy is screaming a slowdown is in train, but inflation isn’t falling, nor is unemployment rising fast enough to please the RBA. It’s why unemployment needs to spike higher, and jobs created in August need to come in less than expected.
Once the stock market starts factoring imminent rate cuts, we should see another leg up, and we should see the big banks and many of the top 20 stocks that have spiked furiously in recent months getting sold off and fund managers and other big players looking for stocks that will benefit from lower rates. Lower rates won’t be a plus for banks, neither is a slowing economy, so the argument that bank share prices are too high makes perfect sense.
As I’ve said before, my preferred play is to back a comeback for BHP and Rio Tinto, where FNArena’s survey of expert company analysts tips average gains of over 14%. More enthusiastic assessors can see 20% plus gains for both companies.
I also like EX20 from Betashares to give me a diversified exposure to the companies listed 21 to 200 in the S&P/ASX 200. EX20 seems to be a natural gainer from the rotation that’s bound to be sparked by the expectations of rate cuts locally and then the actual rate cuts themselves.
For overseas exposure, historically I’ve liked IHVV. I think it will go higher but there could be some lead in the saddle if there are those who sell the Magnificent Seven stocks to take profit to buy other companies in the S&P 500 that will do well with lower US rates.
I’m going to add to my holding of WQG, which has had a good five years and pays dividend, but the big reason is that these guys have been pretty good at picking hot stocks based on big future themes. Their biggest holding is Novo Nordisk, which became famous for making Ozempic, the diet drug. WQG’s share price is up 80% since February 2018 and it currently pays a franked dividend.
WQG
Next week I’ll search for sound small cap funds that should also be big beneficiaries of lower interest rates. For those of you who want more diversification outside the local market, emerging market funds tend to outperform as US rates and the greenback fall.
That’s another investing theme that should work in 2025.
Important informati on: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
