Switzer on Saturday

It’s Coronavirus -vs- reporting season and interest rates

Founder and Publisher of the Switzer Report
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Wall Street doesn’t know who to believe on the Coronavirus, with the Dow down over 200 points after being up over 100 points earlier in the night. This week we’ve heard from the Centers for Disease Control and Prevention and the World Health Organisation, which both said the virus was manageable and less threatening than news services would tell us!

Stock markets hate doubt and uncertainty and that’s what we have. And to make matters worse for us, it comes with stock indexes in the US and here at record high levels so we have a lot of potential profit-takers who could easily press the sell button.

So the day-to-day reports on the severity of the virus will be competing with US reporting season, which at this stage is looking better than expected, with AMEX being the latest to show the US economy is delivering for the country’s top companies. Intel was another over-achiever and came with an improving outlook report as well.

This US reporting season so far is justifying the near 29% rise in stocks over 2019 and gives credibility to the latest increases year-to-date. Only a worse-than-expected virus scenario could derail all this but any sell off would be short term, I suspect.

On the local front for the week, the S&P 500 was up 0.4% to close at 7090.5, with the coronavirus working against stock price increases. Meanwhile the better-than-expected jobs report hosed down the expectations of another interest rate cut in February, which also didn’t help stocks. Economists haven’t given up on one more cut, with some pushing it out to March or April but there is increasing pressure for the Morrison Government to forget about the Budget Surplus and spend to ensure that the bushfire effect doesn’t take our economy into recession.

James Whelan, investment manager at VFS Group told the SMH that he was avoiding oil producers, airlines and airports for the moment.

“If it was any other time of the year I’d be less concerned, but because it’s Chinese New Year the scale of disruption means the ramifications will probably be felt for at least a few months” he said.

The Index is now up 6.1%, which is a great start to a trading year. In this week’s Switzer TV Investing program, Julia Lee of Burman Invest pointed out that there’s more than a 70% likelihood of another positive year for stocks when you have a rip roaring double-digit rise the year before. Also there’s the old maxim that runs like this: “As goes January, so goes the year.”

This old rule of thumb is pretty reliable. According to Stock Trader’s Almanac, going back to 1950, that metric of January’s performance predicting the year has worked 87 percent of the time, with only nine major errors, through 2017. “In the years January was positive, going back to 1945, the market ended higher 83 percent of the time…”(CNBC)

Big company stories included NIB downgrading its profit outlook by $30 million and its share price dropped 16.4%. IAG dropped its margin guidance but who’s surprised, with so many natural disasters with a dust storm turning the East coast brown! The toilet water in our Melbourne office is still brown!

Fortescue continues to show outstanding results, with its share price up 9.4% to $12.48, which is a great result for the true Twiggy believers. That said, CEO Elizabeth Gaines has had a great run since taking over the company.

This week underlined that local companies aren’t really shooting the lights out, which economic data and the February reporting season in coming weeks might show. However, it has been the Wall Street lead, the positivity for global growth coming out of the trade deal and these unbelievably low interest rates that are helping our stocks trend higher.

One day you might think about taking profit and going more defensive and that day could be closer than I thought before the Coronavirus showed up and our latest jobs report. What the RBA decides on Tuesday week could have a big bearing on stocks.

What I liked

  • Employment rose by 28,900 jobs in December – after increasing by 38,500 in November (previously estimated at +39,900). Full-time jobs fell by 300 but part-time jobs were up by 29,200. Economists had tipped an increase in total jobs of around 10,000.
  • Unemployment fell from 5.2% in November in seasonally adjusted terms to 5.1% in December – the lowest level in 10 months.
  • Hours worked rose by 0.5% in December, to be up 2.3% over the year.
  • In trend terms, the Internet Vacancy Index increased by 0.6% in December – the biggest gain in 22 months. There are record vacancies for teachers (“Education Professionals”).
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 1 point (0.9%) to 108.3 – the highest reading since early December. But sentiment remains below both the average of 114.2 points held since 2014 and the longer term average of 113.1 points since 1990.
  • The December readings from the CBA Household Spending Intentions indicators confirm the trends of recent months. Households remain very happy to spend on housing.
  • After growing by an estimated 2.9% in 2019, the International Monetary Fund (IMF) is tipping world economic growth of 3.3% in 2020 and 3.4% growth in 2021.
  • The FHFA house price index in the US rose by 0.2% as expected in November. Existing home sales rose by 3.6% to a 5.54 million annualised rate in December (forecast 5.43 million).
  • The IMF says the Chinese economy is now tipped to grow by 6% in 2020 (previously forecast 5.8%).

What I didn’t like

  • The monthly Westpac/Melbourne Institute survey of consumer sentiment index fell by 1.8% in January after falling by 1.9% in December. The index stands at 93.4 points. Consumer sentiment is below the longer term average of 101.5 points. A reading below 100 points denotes pessimism.
  • According to the December readings from the CBA Household Spending Intentions, consumers remain very cautious about spending at the retail level. And within the overall consumer mix, the preference is to spend on “experiences” over “goods”.
  • Auto stocks fell by 1% after US President Trump threatened to impose tariffs on car imports from the European Union, if the EU didn’t agree to a trade deal.
  • The leading index in the US fell by 0.3% in December (forecast -0.2%).

Next week’s big watches

One of the expected but still worrying economic revelations of this week was the poor Westpac consumer sentiment readings. The consumer is very pessimistic on this monthly reading. But on the ANZ weekly number, consumers are perking up, albeit from a low base – bushfires will do that! That’s why I want to see the NAB business survey on Tuesday, although it is for December, so it will be affected by the worst of the bushfire effect. And then on Wednesday, we see the latest CPI or inflation figure. This will impact interest rate and dollar predictions and then what might happen to stocks.

If news is going to get better, we might have to wait for February or March because statistics are usually a month or two behind except in China, where the statistician is the fastest counter in the world. That said, this quick calculating has always made economists very suspicious about the data out of the world’s second biggest economy.

The Week in Review:

On our YouTube channel:

Top Stocks – how they fared:

 

The Week Ahead:

Australia

Tuesday January 28 – NAB Business survey (December)
Tuesday January 28 – State of the States
Wednesday January 29 – Consumer price index (Dec quarter)
Thursday January 30 – Export and import prices (Dec quarter)
Friday January 31 – Producer price indexes (Dec quarter)
Friday January 31 – Private sector credit (December)

Overseas

Monday January 27 – US New home sales (December)
January 28 and 29 – US Federal Reserve meeting
Tuesday January 28 – US Durable goods (December)
Tuesday January 28 – US Consumer confidence (January)
Tuesday January 28 – US Richmond Fed survey (January)
Wednesday January 29 – US Goods Trade (December)
Thursday January 30 – US Economic growth (Dec quarter)
Friday January 31 – US Personal income (Dec quarter)
Friday January 31 – China Purchasing Manager Indexes

Food for thought:

 “The thing about smart people is that they seem like crazy people to dumb people.”
– Stephen Hawking

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:

This table published by RBA in the report ‘The Australian Economy and Financial Markets: Chart Pack’ January 2020.

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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.