Switzer on Saturday

Is this week’s spooking a sign of things to come?

Founder and Publisher of the Switzer Report
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A serious sell-off has been a long time coming but Wall Street is trying it on right now, as a consequence of the slightly disappointing CPI reading earlier this week. There was a one-day reprieve from negativity when the Producer Price Index (or PPI) came in better than expected, but then on Friday, the profit-takers couldn’t ignore the fact that valuations of many US companies look stretched.

So, we continue with the inflation data-drop watching that has dominated the direction of stock prices since the pandemic came to town.

The escalation of stock prices since October 2023, especially for tech-type companies, explains the big take-off of company valuations. Now, however, we’re in for a period of re-evaluation until the statistics say inflation is continuing to fall. In addition, the Yanks need to get economic readings that say the economy is slowing and unemployment is rising because that’s what US economic history dictates needs to happen.

Yesterday I shared the knowledge of Michael Knox from Morgan’s on what drives the destruction of inflation. A Stanley Fischer lecture he attended “back in the day” (as Knoxy put it) made it clear that inflation falls when unemployment spikes. And you’d recall that March’s better-than-expected jobs report when employment rose by 303,000 instead of an expected 200,000, was then followed by the CPI number that was up 0.4% in March, rather than the expected 0.3%.

Then this was followed up by a better-than-expected PPI of 0.2%, instead of the tipped 0.3%, but March’s annual result was 2.1%, which was higher than the February annual figure of 1.6%. This overall pick up of the PPI on an annual basis has added to the concern that inflation might not find it easy to complete the “last mile” that takes US inflation from the 3% region to the 2% target that the Federal Reserve has in place.

Not helping was JPMorgan Chase’s revenue report overnight, which was less than expected, and its shares fell 5% at one stage. We’re now into the March quarter reporting season and there was a thought that if inflation remains higher than expected, then it could be a plus for company profits, but Wells Fargo and Citigroup’s numbers failed to excite market players.

Not helping the overall index were reports that Israel is preparing for a reprisal attack by Iran and oil prices spiked on the back of those fears. Adding to the negatives for stock prices was the latest University of Michigan’s Survey of Consumers that showed the consumer sentiment index for April came in at 77.9, when 79.9 was expected by the consensus of economists.

All up, it makes perfect sense that all three big US market indexes had a rough day’s trade on Friday, and we’ll cop it on Monday, with SPI Futures expecting a 58 points loss at the open.

The progress of our overall index is being restrained by this ‘up’ on good inflation news and ‘down’ on bad inflation news. It’s becoming a bit like being locked into a Groundhog Day experience. Year-to-date, our market is up a measly 2.1% but since late October last year we’re up 15%, which I think gives you an idea of what’s possible, when it’s clear that inflation is on the slide and rate cuts are close.

Right now, the recent run of data says rate cuts aren’t close in the US so it will be a waiting game until unemployment says inflation is heading towards 2%.

To the local story and while Friday was a negative day with the market off 0.33%, for the week our S&P/ASX 200 was up 0.19% to finish at 7788.10.

There’s real resistance for our index around 7900 and I don’t think it will be tested next week.

BHP lost 0.9% to $45.52 but was up 3.08% for the week, as those betting on a China economic recovery are slightly increasing in number.

Coles (COL) being off 1.22% for the week and Woolworths (WOW) being down 0.43% shows the supermarkets are still in the frame for a government assault on their prices and profits, but a lot of negativity has been built in. Over the past year, WOW’s share price is down 17.53%!

Woodside (WDS) is sticking with its chairman Richard Goyder, despite activists wanting him out. The oil and gas producer saw its share price fall 1.31% for the week to $30.20. The AFR reported that “Pizza franchise Domino’s dropped 7.5% to $40.17 after fronting investors with a strategy update aimed at improving its struggling overseas operations”.

Meanwhile, The Star Entertainment Group fell 7.3% to 50 cents after a big fall in revenue.

Cettire remains on the outer losing 6.9% to $3.12, despite better-than-expected sales numbers. And Genex Power went into a trading halt linked to a buyout bid and an information update next week.

Meanwhile, NextDC lost 1.3% over the week when it announced a $1.32 billion capital raise to expand its operations in Sydney and Melbourne. Details and analysis of the implications will follow next week.

What I liked

  1. The US PPI number of 0.2% rather than 0.3%, but it wasn’t enough to outweigh the poorer CPI result.
  2. While the latest US consumer sentiment number wasn’t great, the Yanks need some negative economic statistics to bring back belief that rate cuts can happen this year.
  3. According to a monthly survey of business by National Australia Bank, business conditions fell 1 point to +9 index points in March from February, while business confidence rose 1 point to just +1 index point. Business is doing OK despite a slowing economy.

  1. Good news in the NAB survey was that business cost and price pressures continue to ease, consistent with a further fall in inflation.

  1. US small business optimism was down in March with falling hiring plans and weak capex, which might be a sign that the economy is starting to slow, which will help rate cuts eventually show up.

What I didn’t like

  1. US CPI coming in at 0.4% rather than the expected 0.3% for the March reading.
  2. Bond yields rose in response to the higher-than-expected US inflation data.
  3. The once thought June rate cut in the US is now pushed out to September.
  4. The early US banking company profit reports.
  5. The Westpac Melbourne Institute consumer sentiment index declined by 1.8% in March to a reading of 84.4 from 86 in February, remaining in deeply pessimistic territory.
  6. The Iran-Israel impact on oil prices, which doesn’t help the fight against inflation.
  7. This “Future Made in Australia” plan sounds just like protectionism and could be inflationary.
  8. Chinese inflation was too low and doesn’t scream the economy is roaring back. Producer price deflation continued at -2.8%!

Stay and think long term

In his Stanford University speech in 2005, Steve Jobs advised the graduating students to “Stay hungry. Stay Foolish”. And while it can be great for future entrepreneurs to be ‘outside the square’ and be foolish compared to inside-the-box rivals, my favourite advice to investors is to understand that crazy things can happen to markets in the short term, but staying long term in your thinking will mean you will avoid silly short-term reactions, and you will see buying opportunities.

The words of AMP’s Shane Oliver yesterday are worth sharing with you: “Despite the volatility over the last two weeks, we continue to see further gains in shares this year as inflation slows, central banks still cut interest rates and recession is avoided or proves mild. But shares remain vulnerable to more volatility and a possible correction as valuations are stretched, particularly with higher bond yields (first chart below), investor sentiment is too bullish (second chart below), uncertainty remains high regarding the timing of rate cuts, recession risks remain high and there are multiple geopolitical threats (particularly around the war in the Middle East and the US election).”

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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 

 

Quote of the Week

In case you are getting nervous about stocks for 2024, think about this from AMP’s Shane Oliver:

“Despite the volatility over the last two weeks, we continue to see further gains in shares this year as inflation slows, central banks still cut interest rates and recession is avoided or proves mild. But shares remain vulnerable to more volatility and a possible correction as valuations are stretched particularly with higher bond yields (first chart below), investor sentiment is too bullish (second chart below), uncertainty remains high regarding the timing of rate cuts, recession risks remain high and there are multiple geopolitical threats (particularly around the war in the Middle East and the US election).”

 

Chart of the Week

This is the CPI (Inflation) chart that spooked the market on Thursday

 

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.