Switzer on Saturday

Is this market comeback sustainable?

Founder and Publisher of the Switzer Report
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With the infection curves heading in the right flattening direction, we’re seeing stock markets defy gravity and gradually take back some of the lost ground best captured in this hard-to-look-at chart.

S&P/ASX 200

But at least we’ve made a comeback, with our S&P/ASX 200 Index rebounding 18.4% after a 36% slump.

Meanwhile, the Yanks look like real believers in the market comeback, with the Dow up 12.67% over this week, which was its biggest ever percentage gain in a week! The S&P500 was up 12.1% over the four-day trading week, which was the best week since 1974.

Arguably, this is the most important index in the stock market world, with 500 of the most important companies in the US. The index lost 1,000 points in the slump in recent months. Now it’s added back around 500 points!

For the record, after Thursday’s rally, the Dow is up more than 27% from its March closing low but it’s still down 16.9% this year. This is the most volatile market we’ve ever seen! Closing down the world economy is an historical shock event and if you throw in the impact of computer trading, you can understand why stocks have fallen and risen with such gusto that’s never been seen before.

Did I say the Yanks look like believers that what sent the global stock markets and other financial markets into freefall (when we faced the reality of a global pandemic) is now looking like a lesser problem than was imagined on February 20, when we saw the fastest fall in stocks ever?

But is this optimism sustainable? Experienced fund managers, such as Geoff Wilson of WAM and Roger Montgomery of MIM, are holding, cash waiting for another buying opportunity. They recall other bear markets, which often have two or more big rallies before capitulation happens and stocks start their inevitable march higher.

They agree with Paul Rickard, who says companies will have capital raisings, which will take share prices down and that can then signal that it’s time to get in ahead of a solid market advance. And starting soon will be reporting season in the US, where a whole pile of CEOs will share their crystal balls about the future of their companies – and it won’t be pretty.

So how have stocks rebounded with such conviction, especially in the USA, when the flattening of their infection curve is miles less convincing compared to ours here in Australia?

Here are some of the reasons for US stocks optimism:

  • The infection rates around the world are looking better, especially here and in Europe. But the likes of Chris Joye, who has been on the money predicting the course of global infections, says the US will peak in a week or two and US market players would be on to this.
  • The US Treasury Secretary, Steve Mnuchin, who is a loyal Trumpist, has been talking about opening up the US for business in mid-May!
  • The Fed threw $US2.3 trillion at small to medium enterprise (SME) loans in the States and this continues the aggressive pro-liquidity stance of the US central banks and their equivalents around the world.
  • Then there are the huge stimulus packages of Governments.
  • And of course, the initial huge sell off was based on uncertainties of what pandemic containment policies would mean to economies, company profits, unemployment and stock prices.

So history says expect another sell off and I think it would need some really bad news to arrive that was seen as unexpected, such as a second wave of worrying infections and deaths in say China or Italy. Similarly, if the world getting back to business too fast explodes in our face, with an outbreak of deaths meaning more business closures, lockdowns and the belief that the stimulus packages won’t be enough!

If getting back to business follows the new and much quicker script that the stock market is starting to believe, then all this promised stimulus will set the world up for a huge economic recovery. This possibility isn’t lost on some economists and big market players.

And you have to remember that while the history of bear markets tells us to be prepared to see another sell off before another big rally, this is a significant event with no real historical story to follow because never, ever have global governments and central banks reacted so quickly, so determinedly and with such firepower!

So that’s the potential platform upon which we place our bets on the stock market. And I can’t confidently speculate whether we’ll go down again or keep sneaking higher because I don’t know about Coronavirus infections. The world looks set to gamble that we go back earlier than expected, with the NRL hoping to start kicking off on May 28. Austria is starting to open shops in mid-April and bigger stores at the end of the month. If that works out, then cafes and restaurants will be given the nod by mid-May!

It’s a global gamble, with the biggest bet likely to be placed by the Yanks in May, which could make or break stocks.

With the above revealed, what other big standout developments need to be grasped by anyone trying to work out how to play stocks right now?

Here’s a list to be considered:

  • The IMF says the recession ahead will be the worst since the Great Depression. That’s about as revealing as saying it rains a lot in the UK. This recession has to be one of the deepest because of the shutting down of economies but it could be one of the quickest to end because of getting back to work sooner than was thought and because of the huge stimulus packages.
  • Joye’s latest email to me on Friday said: “The good news is that similarly truncated coronavirus stories are playing out around the rest of the world. Germany looks like it peaked on March 27. Italy and Spain were a few days later on March 29 and April 1, respectively. UK infections climaxed on April 6. And our models anticipate that France will get there on April 14.”This chart shows the good infection news in worrying regions of the EU:
  • Shane Oliver has shown how we’re doing with the virus on a world table (see the chart below). And with no sport, it’s good to see we’re kicking goals and the Coronavirus’s butt. “Out of interest, a ranking of how well countries have grappled with coronavirus based on the percentage of cases that have recovered, total cases relative to the outbreak’s duration, active cases per capita and tests per capita ranks Australia at number 3, behind only China and South Korea out of 30 countries,” Shane wrote. “Italy is ranked 22nd, the US is ranked  23rd and the UK is ranked very poorly at 27th.”
  • On whether this shares comeback can be sustained, Shane said: “It’s still too early to say that shares have bottomed as there is still a lot of bad news to come, but increasing policy support against the backdrop of increasingly positive signs that suppression is working and it may be possible to relax lockdowns in the next month or so, are positive signs that we’ve seen the low or have come close to the low.”
  • Standard &Poor’s (S&P) cut Australia’s AAA sovereign credit rating outlook to negative on the back of the Government’s fiscal stimulus but this is unlikely to have much impact on Australian borrowing costs. Australia’s public debt-to-GDP ratio will remain well below that of other major countries that are also undertaking fiscal stimulus and if a recovery comes faster than expected, S&P will back off.

Despite talk about banks cutting dividends on Tuesday, bank share prices spiked on Thursday. Commonwealth Bank climbed 3.3% to $61.76, ANZ rose 6.6% to $16.54, Westpac rallied 4.7% to $15.96 and NAB spiked 4.8% to $16.08.

I’m still ignoring economic stuff

In case you missed it, the RBA had an interest rate decision on Tuesday and did nothing. The US saw jobless claims rise by 6.6 million in a week, which has grown by 16 million in three weeks! And an ABS survey reported that 66% of businesses saw reduced turnover, thanks to the shutdowns (up from 49% the week before) and ANZ job ads plunged 10% in March as the labour market started to weaken.

These numbers are meaningless in such a crazy Coronavirus world and so I’m watching infection and death rates hoping to see the good news continue. Then I’ll be looking at what the world is doing about getting back to work.

Take a look at this chart and thank God, our medical teams, our politicians and the rest of us for making this containment happen.

Go Australia and go the world!

The week in review:

On our YouTube channel this week:

On our podcast:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday April 14 – NAB Business confidence/conditions (March)
Tuesday April 14 – CBA Household spending intentions (March)
Tuesday April 14 – Credit & debit cards (February)
Wednesday April 15 – Weekly consumer sentiment (April 12)
Wednesday April 15 – Tourist arrivals & departures (February)
Wednesday April 15 – Monthly consumer confidence index (April)
Wednesday April 15 – Building & construction activity (December qtr.)
Thursday April 16 – Employment/unemployment (March) 

Overseas
Tuesday April 14 – China International trade (March, annual)
Tuesday April 14 – US NFIB Small business optimism index (March)
Tuesday April 14 – US Import/export price indexes (March)
Wednesday April 15 – US Retail sales (March)
Wednesday April 15 – US Empire State manufacturing index (April)
Wednesday April 15 – US NAHB Housing market index (April)
Wednesday April 15 – US Industrial production (March)
Wednesday April 15 – US Federal Reserve Beige Book
Thursday April 16 – China Home prices (March)
Thursday April 16 – US Housing starts & building permits (March)
Thursday April 16 – US Philadelphia Fed business index (April)
Thursday April 16 – US Initial jobless claims (Week ended April 11)
Friday April 17 – China Economic growth (GDP, March annual)
Friday April 17 – China Investment/production/retail sales (March)
Friday April 17 – US Leading index (March)

Food for thought:

“Don’t wish it was easier. Wish you were better!” – Jim Rohn

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:

Top 5 most clicked

Quality stocks to consider buying now – Peter Switzer
9 stocks worth a serious look – Tony Featherstone
4 healthy stocks in a post-COVID-19 world – James Dunn
How to think through what happens next… – Charlie Aitken
Buy, Hold, Sell – What the Brokers Say – – Rudi Filapek-Vandyck

Recent Switzer Reports:

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.