Switzer on Saturday

It was a week when the global story might be more insightful

Founder and Publisher of the Switzer Report
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It really shouldn’t be a surprise to learn that US stock market indexes were hard pressed to keep rising on Friday, after looking like they were set to register their best week this year-to-date. All three were up over 2% for the week before the close and it was the message from Fed boss Jerome Powell that was most responsible for these big gains for share prices.

What did he say that was so market moving? It was a bit of a ‘nudge, nudge, wink, wink, say no more’ but the market interpreted it as three rate cuts are set to be delivered this year. It came as the Swiss central bank surprised with a rate cut and European Central Bank President Christine Lagarde indicated it remains on track to move into the “dial back phase” or rate cut phase, but she needs the data to keep making it easier for her to do so. Even so, AMP’s Shane Oliver thinks a June rate cut is on the cards.

Meanwhile in the UK, inflation fell to 3.4%, which led Reuters to headline the news this way: “Easing UK inflation keeps BOE on track for rate cuts later in 2024”.

All these rate cut stories are somewhat at odds with what was suggested in our media, following a big fall in unemployment in February (4.1% to 3.7%) and 161,000 jobs created. However, economists think the numbers could prove dodgy, considering what other economic data is telling us about a slowing economy.

I think the messages coming from the global economy on inflation and interest rates might be more insightful about what rates will do this year and how they’ll affect stock prices.

Strategists from Investment bank Société Générale have no doubts about how lower rates will help share prices. This week they’ve lifted their year-end target for the S&P 500 to a big 5500 from a previous call of only 4750! These guys are bulls for US stocks, arguing that “…the macro backdrop continues to improve in the US, with a reshoring boom, the artificial intelligence boom and now improving credit conditions and lending standards”.

Be clear on this: a pullback can always happen after such a big run up for US stocks. On the other hand, this look at the past week from Shane Oliver shows why remaining positive on stocks and seeing any selloffs as a buying opportunity makes complete sense. “US, European and Japanese shares rose to new record highs over the last week helped by solid economic data, further falls in inflation and indications that major central banks are heading towards interest rate cuts this year,” he explained. “Chinese shares fell slightly despite better-than-expected economic data. Australian shares rose around 1.2% helped by the positive global lead and the RBA moving to a neutral bias on interest rates with gains led by resources (helped by higher iron ore prices), property, industrial and financials shares.”

All up, economic data will remain the big-watch factor for stocks, but it will have to be a surprise left-field event of a black swan nature to derail this rally. By definition, a black swan isn’t usually expected.

To the local story and the S&P/ASX 200 index was up 100.3 points (or 1.31%) to finish at 7770.6. That’s a year-to-date rise of only 1.87%, while the 12-month gain is 11.7%.

The standout big cap performers for the week were NAB, up 2.81%, Santos put on 2.18%, Rio was up 3.09%, while BHP defied recent negativity, adding 3.25%, despite its share price being down on Friday.

The AFR reported that “ANZ analysts Daniel Hynes and Soni Kumari wrote in a report that the iron ore price may be nearing a floor amid a reset in expectations around demand”.

On the gold front, Bellevue Gold dropped 5.3% on Friday to $1.885 and Genesis Minerals lost 6.37% to $1.80 but the former is up 11.87% for the week and 61% higher over the year, while the latter is up 76% over the past 12 months.

The AFR also reported that “…Fisher & Paykel Healthcare rallied 7.7 per cent to $24.18 and was the best performing stock on the ASX 200 after the company upgraded its full year earnings guidance to a range of $NZ260 million ($239.1 million) to $NZ265 million.”

What I liked

  1. The fall in local unemployment from 4.1% to 3.7% for jobseekers and businesses but this could be bad news for interest rate worriers.
  2. Switzerland’s central bank unexpectedly cut rates by a quarter point overnight
  3. This week the Federal Reserve didn’t back away from its forecast of three rate cuts for 2024.
  4. The US Conference Board’s leading index rose for the first time in two years.
  5. Chinese economic data got a lift, with industrial production and investment coming in stronger than expected and accelerated compared to late last year.

What I didn’t like

  1. Australia’s population rose by a record 659,800 people over the year to the September quarter, or by 2.5% year-on-year, its fastest pace since the 1950s. I like immigration for economic growth, but this is too fast, especially given our supply of housing, the price of homes and rent increases, which don’t help inflation.
  2. Global PMIs, which are like global business surveys of purchasing managers weren’t strong, but this partly explains why central banks are talking about future rate cuts.
  3. The question marks over whether we can believe those job numbers of 116,000 new jobs in February and unemployment falling from 4.1% to 3.7%.

Another optimist rooting for small caps

CNBC reported overnight that Wells Fargo analyst Christopher Harvey wrote the following in a note on Friday: “The Fed’s reiteration of monetary easing plans despite expectations of a hotter macro backdrop predictably ushered in another wave of ‘risk-on’ trading. We think this upward bias to equity prices will persist in the near term”.

Harvey agrees with me that this stage of the rally should be good for small and mid-caps.

The S&P 500 is up 10.4% year-to-date, while the small cap Russell 2000 is up only 3.4%.

So, we still have time to catch that next leg up for stocks.

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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

CBA economist, Belinda Allen, raised questions about the February job numbers threatening rate cuts, saying the following: “The current cohort of labour market data is not matching the weak growth picture in the National Accounts or other second tier labour market data like jobs ads and applicants per job from Seek. We suspect we will receive some payback in the March numbers and will see the data converge.”

 

Chart of the Week

Unemployment dives from 4.1% to 3.7% in February!

 

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.