Switzer on Saturday

Is the data drop telling us we’re out of the woods?

Founder and Publisher of the Switzer Report
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Wall Street is defying history with September being notorious for sell-offs, but the overall vibe of the data drops seems to be saying inflation is falling, interest rate cuts are coming and maybe those recession fears of early August just might be overblown.

This all makes sense, but, so far, this week’s rally looks guarded. So, it should be with so many curve balls out there. Right now, the ‘batters’ at the Fed and running listed companies seem to be seeing those balls very well so the economy looks good, and stock prices are heading up.

In case you’re not getting my baseball analogies, suffice it is to say that the Fed looks like it’s getting its soft landing and company CEOs are producing profits that are underpinning rises in share prices.

However, next week’s run of data will be closely scrutinized. The experts won’t want to see a US economy looking like it’s slowing too quickly. That could lead to another August-like sell-off. And then there’s the threat of what Fed boss Jerome Powell says when the expected rate cut shows up next week in the United States. His utterances could end up being a market-maker or -breaker.

Central bank bosses can unsettle markets with their musings about the future. Then there’s that old market-weird behaviour that while investors buy stocks on the rumour that a rate cut is coming, when it happens, they then sell-off! Yep, the old ‘buy the rumour, sell the fact’ happening has shocked me a few times, especially when I was wetter behind the ears!

The overall market, as gauged by the S&P 500 is up over 18% year-to-date, so it’s vulnerable to any surprising bad news or profit-takers, who are aware how threatening September can be. In fact, the last two weeks of this month historically have a terrible negative record.

All this has made me cautious and keeps me on my toes until next Wednesday in the US (which will be our Thursday) when the interest rate decision is made.

I think Quincy Krosby, chief global strategist for LPL Financial, summed it up right when she gave this to CNBC: “The market is trying for a positive close after what’s been a choppy, yet hopeful, week … Investors are on guard for further bouts of volatility, particularly given the expectations surrounding the Fed meeting.” Quincy knows the history of stocks in September, and it makes it hard to invest with confidence. That said, even if we see some challenges for stocks in coming weeks, I’m still investing on the basis that 2025 will be good for at least the first half.

This week, the good inflation story in the US (with the CPI up a low 2.5% for the year) was added to with the latest University of Michigan’s Survey of Consumers finding that consumer confidence improved in September, while near-term inflation expectations receded to their lowest level in nearly four years.

Aside from the big Fed move on rates this week, the Yanks get a plethora of economic data that’s bound to paint the picture of a soft or hard landing with retail sales, industrial production and other growth indicators on show, which will be crucial for stocks.

By the way, this week Wall Street has been debating whether the first cut will be 0.25% or 0.5%, but there are concerns that a 0.5% cut might spook the market that the Fed could be worried about a recession.

Interestingly, Ned Davis Research has found that the stock market does better with a slow-cutting rates cycle, rather than a ‘big bang’ cutting affair that tends to worry players that the Fed has been behind the curve.

In case you’re not up with this debate, the experts are suggesting the US could see seven to nine rate cuts! If that happens, you can bet we’ll see a lot more cuts than many local borrowers are currently expecting.

In Australia this week, we have the August job report. The RBA wants to see a rise in the unemployment rate before it considers a rate cut is needed. Economists expect 20,000 jobs were created but if the number is lower or negative, then the central bank might start changing its tune on the need for a rate cut this year. On the other hand, a bigger number won’t help those sweating on a rate cut. It would send the dollar up on the expectation that rate cuts come next year and not in 2024.

The thought of a rate cut sooner than is currently expected would be well received by our stock market.

To the local story, and the S&P/ASX 200 hit a six-week high of 8143.6 points but lost ground from this peak reading as banks fell out of favour. The index ended up 85.50 points (or 1.08%) for the week to finish at 8099.90. In this troublesome month of September, the index has basically gone nowhere but there have been some interesting developments, especially the re-loving of lithium stocks.

Stars of the week

  1. On a good week for lithium, Liontown Resources was up 10.7% to $0.67.
  2. Evolution Mining was up 11.05% to $4.32.
  3. Northern Star rose 7.66% to $15.60.
  4. Mineral Resources spiked 26.13% on a good week for iron ore and lithium to $38.33
  5. Pilbara Minerals shot up 18.37% to $2.90. Yep, it was all about lithium and panicky short sellers!
  6. Chalice Mining was up a big 34.22% to $1.25. Again, worried short sellers helped!
  7. Wisetech rose 6.39% to $131.04 because it’s a great company!
  8. Paladin was up 11.81% to $9.37, thanks to Vlad Putin talking about limiting uranium exports to the West.
  9. Polynovo rose 12.17% to $2.58.

Strugglers this week

  1. Guzman y Gomez lost 4.89% to $38.31 on profit-taking after a good run.
  2. Steadfast Group shed 10.7% earlier in the week linked to a customer controversy but ended off 8.4% to $5.67.
  3. Life360 finished 8.7% lower to $16.96.

(Note: Many stocks had bad days this week but most still finished in the green, as it was a good week for shares.)

What I liked

  1. Though the NAB business survey was negative for economic growth, there were good inflation indications. AMP’s Diana Mousina observed: “The price indices showed that labour costs growth eased, purchase cost growth went up and final product price growth slowed.” The broad trend in price indicators is down.
  2. Good Chinese export numbers was a bright spot for a challenged economy.
  3. The US August consumer price index rose by 0.2% over the month (or 2.5% over the year) in line with expectations.
  4. The August US producer price index rose by 0.2% over the month (expectations were for 0.1%), with annual growth at 1.7%. The number missed expectations but is still low. And remember, if the number was too low, it would regenerate recession fears.
  5. The European Central Bank cut the deposit rate for the second time, taking interest rates to 3.5%.

What I didn’t like

  1. Low inflation in China was seen as bad sign for demand there.
  2. Australian consumer confidence fell again in September to an index reading of 84.6 (which means that consumers are still feeling negative as an index level of 100 divides the number of optimists vs pessimists). Confidence is stuck at levels usually associated with a recession.
  3. The August NAB business survey was disappointing. Conditions fell back to below average, and confidence fell into negative territory. Employment conditions declined, along with trading conditions and profitability and forward orders remained negative.

Volatility for now but it will end

Here’s the AMP economics team view on investing: “We remain of the view that shares are at high risk of further falls in the short term because valuations are high, seasonality is a problem in September, there could be more downside for tech names like Nvidia, economic data could start moving into “concerning” territory as activity has slowed, which will increase fears of recession and geopolitical risks like the US election and the issues in the Middle East could see investor uneasiness. But, over a medium-term view, we’re still optimistic on the outlook for shares because inflation is slowing, central banks are cutting rates, earnings growth looks reasonable and economic growth is holding up for now.”

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

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 

 

Observation of the Week

Westpac’s economics team: “The September Westpac-MI Consumer Sentiment survey once again emphasised the deep pessimism entrenched among Australian households, with the headline index ticking down –0.5% to 84.6. Concerns over the economic outlook are starting to have more of an impact on consumers’ attitudes, the sub-indexes tracking views on the economy down –2.6% and –1.0% respectively for the ‘one year ahead’ and ‘five years ahead’ measures.”

The economists added: “Increasingly we are seeing a spillover of consumer weakness into the business sector. This was evident in the Q2 national accounts and is echoed by the latest NAB business survey. The business conditions index fell –3pts to +3, leaving the index in a clear downtrend from post-reopening highs. Highlighting the persistence of this trend, August was the 11th consecutive negative reading for forward orders; the employment index is at its lowest level since January 2022. It is not surprising then that business confidence slid from broadly neutral to pessimistic, down 5pts to –4.”

(These negatives are a plus for a rate cut this year.)

 

Chart of the Week

This Trading Economics chart shows US inflation at a 3-year low of 2.5% for the year to August.


Disclaimer

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.