What a week! I’ve never had so many media outlets asking me to explain an inverted yield curve! I guess when you link this confusing concept for normal people to the R-word for recession, then you get mainstream media and normal people worried.
And Wall Street was scared as well. On Tuesday, the Dow Jones fell by 800.5 points (or 3.1%), ending the trade near session lows. And it was the biggest fall since October last year. The S&P500 fell by 2.9%, while the Nasdaq lost 242 points (or 3%).
That was a scary day and I feared a black swan event was about to be revealed that might justify what I think is over-hype and overreaction to the signals from the bond market.
Explaining the nervousness was the news that Germany had contracted, which some media people thought was a recession! It contracted by 0.1% and it will need another contracting quarter before we call it a recession. And on the same day, Chinese economic data was weaker than expected. “The Chinese economy continued to be weighed down by the tariff war with the United States,” explained CommSec’s Craig James. “Production, retail sales and fixed asset investment all recorded slower annual growth than the previous month with annual growth rates also all falling short of economist forecasts.”
Economists think that the response by the Chinese Government may be some combination of an acceleration of infrastructure spending, stimulating the economy by fiscal or monetary policy measures or more actively seeking a trade agreement with the US. They could even drop the yuan, which could get Donald Trump pretty angry.
On that front, Donald eased up on his trade war pressure, announcing that the US would delay the imposition of a 10% tariff on $300m of Chinese goods. The tariffs had been planned for September 1. It’s now proposed to implement the new tariff on some goods from December 15. And the goods that have a three-month reprieve will be consumer goods, such as Nike shoes and Apple iPhones, which means the US consumer won’t be taxed/tariffed for this Christmas shopping!
There was a bit of Trump self-interest in that move, as the US consumer is America’s greatest economic asset at the moment because the trade war is impeding business investment, which is understandable. I think Australian business investment was restrained by the Royal Commission, APRA’s impact on lending and its effects on house prices. And then there was the pre-election fear, along with the anxiety over Labor’s proposed policy changes. Recent experiences show that politicians can create and destroy growth!
The best news for markets was the report that the President phoned into a meeting between Treasury Secretary Steve Mnuchin with the head of three huge US banks – J.P.Morgan, Citigroup and Bank of America – on Tuesday as stocks were nosediving 3%.
He wanted to know their views on the US consumer, the economy and the global economy.
One of the attendees spoke off-the-record with CNBC.
“The executives responded that the consumer is doing well, but that they could be doing even better if issues including the China-U.S. trade war were resolved, this person said,” CNBC revealed. “The CEOs also told Trump that the trade dispute is damaging the outlook for capital spending by corporations, according to another person with knowledge of the discussions. The president was receptive to the notion that uncertainty over trade is hurting corporate confidence, this person said.”
This is good news because stock markets and economies worldwide need to see an end to the uncertainty that this trade war has brought. If a trade deal could be had, all economies would benefit, the bond curve would end its inversion and stocks would spike.
Overnight, bond yields actually rose, reducing the inversion implication and coincided with Trump-talk that he has a telephone call with Xi Jinping “happening soon”, the news about his connecting up with business leaders over the week (as recession headlines emerged) and Germany is said to be close to issuing debt via bonds to stimulate its economy.
Tom Lee of Fundstrat Global Advisors, who two years ago tipped this bull market could go on for 11 more years, was keeping it positive on Friday.
“We have been saying this is a buying opportunity and back up the truck,” he said in a note on Friday. “But history and even global comparisons show that the S&P 500 should rally. We realize there are many reasons to tilt bearish – don’t forget the White House wants higher stock prices. The Fed does not want stocks to fall. And US consumers may not be paying much attention to inverted yield curves.”
On the local front, our stock market gave into the recession fears out of Wall Street and the bond market. The S&P/ASX 200 Index lost nearly 180 points (or 2.7%) to finish at 6405.5. It was the worst result since November last year.
Banks copped it. CBA dropped 5.4% to $75.12, ANZ gave up 2.3% to $26.39, NAB lost 2.2% to $27.03 and Westpac fell 1.4% to $27.82. And these will be stocks that will spike if a trade deal comes and recession fears abate. That’s the gamble.
Not surprisingly, recession concerns hit resource stocks, with BHP down 3%, Rio 3.4%, Woodside 5.9% and what about Oil Search off 10%!
Best news of the week from earnings season was the good reports and rising share prices of JB Hi-Fi and Super Retail Group, which was a kick in the pants to shorters and those who doubted the quality of retailers and local consumers!
As the AFR reported: “JB Hi-Fi closed 11.1% higher at $31.05 and Super Retail added 13.9% to end the week at $9.75.” And Gerry Harvey, who hates short-sellers, would be smiling, with HVN up 7.2% for the week.
Personally, I think we are looking at another buying opportunity for when a trade deal happens. This recession scare mongering might force Donald Trump to get closer to a deal. This week, there’s the big conference in Jackson Hole, Wyoming, where the Fed boss, Jerome Powell will speak. The market will hang on every word he speaks and so will Donald Trump.
What I liked
- In seasonally-adjusted terms, average weekly ordinary time earnings (AWOTE) rose by 3.1% in the year to May – the fastest growth in six years. The average annual wage is $85,010.
- The wage price index rose by 0.6% in the June quarter (consensus: +0.5%). Annual wages growth was steady at 2.3% – near 4½ year highs.
- Employment rose for the 33rd out of 34 months in July.
- Jobs increased by 44,000 but economists expected 14,000.
- Full-time jobs rose by 34,500.
- Unemployment was steady at 5.2% but the participation rate rose to a record high of 66.1, which stopped the jobless rate falling.
- The Westpac/Melbourne Institute survey of consumer sentiment index rose by 3.6% (the biggest lift in six months) to 100 points in August. The sentiment index is near its long-term average of 101.5 points. The reading says optimists equal pessimists.
- The ‘time to buy a dwelling’ index rose by 3% to 126.9 points in August – the highest level in 5½ years.
- The NAB business confidence index rose from +2.3 points in June to +3.9 points in July.
- The annual number of permanent and long-term overseas arrivals rose to a fresh record-high of 850,770 people, up by 5.2% over the year to June. Population growth is good for economic growth.
- Be careful of being anti-Chinese as China is the largest source of tourists to Australia. Over the past year, a record 1,450,000 tourists came to Australia from China, up by 1.4% on the year earlier.
- US retail sales rose by 0.7% in July (forecast +0.3%).
- New US mortgage applications lifted by 21.7% in the past week, after a 5.3% gain in the previous week.
What I didn’t like
- The NAB business conditions index fell from +3.6 points in June to +2.4 points in July. The long-term average is +5.8 points.
- The 12-month moving average of the NAB profitability index fell to a 4-year low of +4.95 points in July, down from +5.76 points in June. The long-term average is +4.6 points.
- The 12-month moving average of the NAB employment index fell to a 2-year low of +5.36 points in July, down from +6.26 points in June. The long-term average is +2 points.
- Tourist arrivals fell by 3% in June with departures down by 2.3% but a record 9.34 million tourists came to Australia in 2018/19. But there was a record 11.23 million Aussies travelling abroad.
- The German economy contracted 0.1% in the June quarter
- Weaker-than-expected Chinese economic data.
- That damn yield curve!
- The Philadelphia Federal Reserve manufacturing index fell from +21.8 to +16.8 in August (forecast +10).
- Hong Kong and what it could mean. A Chinese troop invasion would be bad for protestors and stock markets!
- The Argentinian peso sold off steeply after the country’s centre-right President Mauricio Macri performed poorly in primary elections.
Thank you!
I’d like to thank the 900 plus attendees to our Switzer Listed Investment Company conference in Sydney on Friday. It was timely, with many investors worried about inverted yield curves and recession-talk but I know just about everyone walked away with insights from our great speakers that will convert into rewarding returns.
I look forward to seeing our subscribers in Melbourne on Tuesday and Brisbane on Wednesday. Melbourne is sold out but we still have a few seats left in Brisbane [1].
My new book ‘Join the Rich Club’ is now available through the Switzer Store website [2]. Copies of the book will also be available for purchase at our conferences in Melbourne and Brisbane next week.
The week in review:
- When bad news hits, most stocks sink. But the smarties look to play defence before defence is needed and go fishing for stocks that fall into this category. Here are 8 stocks to consider [3].
- JB Hi-Fi meets the criteria of a great stock for an investor’s portfolio but there are concerns about sector headwinds not abating and whether the company’s growth profile might be maturing. So is it a stock to consider adding to your portfolio when the market (or the shorters) are keen to sell? Read Paul Rickard’s article to find out his view [4].
- In his articles this week [5], Percy Allan wrote that the best way to alleviate global problems is for the world to find a new engine of growth that generates higher earnings to enable share markets to advance further.
- James Dunn looked at 6 stocks [6] that have had a fair bit of Brexit uncertainty priced into their valuation, but which could rebound if and when Brexit happens.
- The bulk metals of iron ore and coal have had plenty of support this year and gold has rallied as investors seek safe-haven assets. As Tony Featherstone wrote this week [7], now base metals are getting overdue attention.
- In the first Buy, Hold, Sell – What the Brokers Say [8] of the week, FNArena counted 9 recommendation upgrades versus 5 downgrades, while there were 10 downgrades and 7 upgrades in the second edition [9].
- Our Hot Stock [10] this week from CMC Markets’ Michael McCarthy was Computershare (CPU).
- In Questions of the Week [11], Paul Rickard answered queries about how an ETF grows, whether the ‘record’ date is relevant, investing for your kids and why certain infrastructure stocks aren’t going up.
Top Stocks – how they fared:
The Week Ahead:
Australia
Tuesday August 20 – Weekly consumer confidence
Tuesday August 20 – Business Sales index (July)
Tuesday August 20 – Reserve Bank Board minutes
Wednesday August 21 – Skilled vacancies (July)
Thursday August 22 – CBA ‘flash’ purchasing managers (August)
Thursday August 22 – Detailed labour force (July)
Sunday August 25 – Speech by Reserve Bank Governor
Overseas
Tuesday August 20 – US Weekly chain store sales
Wednesday August 21 – Skilled US Weekly mortgage applications
Wednesday August 21 – Skilled US Existing home sales (July)
Wednesday August 21 – Skilled FOMC minutes
August 22-24 – Jackson Hole Symposium
Thursday August 22 – US Weekly jobless claims
Thursday August 22 – US Leading index (July)
Thursday August 22 – Flash manufacturing/services gauges
Thursday August 22 – US Kansas Fed manufacturing (August)
Friday August 23 – US New home sales (July)
Food for thought:
“The markets are unforgiving, and emotional trading always results in losses.” – Alexander Elder
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:
After the yield curve inverted on Wednesday US time, The Washington Post published the following chart looking at previous yield curve inversions and subsequent recessions:
Top 5 most clicked:
- Should you buy these 8 stocks that defied China’s currency fall? [3] – Peter Switzer
- Postcard from London: 6 stocks that could rebound if/when Brexit happens [6] – James Dunn
- What’s the way out of this global debt trap? [5] – Percy Allan
- Buy, Hold, Sell: What the Brokers Say (Monday) [8] – Rudi Filapek-Vandyck
- Buy, Hold, Sell: What the Brokers Say (Thursday) [9] – Rudi Filapek-Vandyck
Recent Switzer Reports:
Monday 12 August: Should you buy these 8 stocks that defied China’s currency fall? [12]
Thursday 15 August: Australia, Asia and other emerging markets enabling share markets to advance [13]
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.