Switzer on Saturday

It’s looking safer to believe in stocks

Founder and Publisher of the Switzer Report
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Last week there was blood in the streets in the ‘town’ of New York as recession fears hit Wall Street, the Nasdaq in Times Square and stock markets of the world, with Tokyo’s Nikkei Index slumping 12.4% in a day! But now it looks safer to believe in stocks after the S&P 500 registered, wait for it, the best week of the year! Only in America!

And while I’d like to jump on the optimism train and say ‘let’s buy stocks with our ears pinned back’, I have to remember that August and September historically are the worst for US stocks, a US election looms in the first Tuesday of November and big influential market players are on recession watch when it comes to the economic health of the world’s premier economy.

Overnight positivity prevailed for stocks, with the big market indexes heading for 3% plus weeks. Helping share prices was good economic data out on Thursday that showed retail sales in July jumped 1%, which was the biggest rise for the year. Meanwhile, there was a fall in jobless claims and, all up, money markets now see a 0.5% cut in the Fed’s official rate in September only a 27.5% chance. Before this data drop, it was 41.5%.

“[The] data released over the past week has struck the right balance, being not too hot, nor too cold,” UBS head of investment for global wealth management Mark Haefele wrote on Friday. “This should help allay both concerns of a looming recession or that sticky inflation will hamper the Federal Reserve if swift rate cuts are needed to defend growth.” (cnbc.com)

This is all good news but while I note that Nvidia was up 18% this week and Apple and Microsoft were up over 3%, I can’t forget that two weeks ago these big tech stocks and ‘stars’ of the Magnificent Seven were smashed. If recession fears are rekindled via the vagaries of what the US statisticians serve up, then we’ll remember why August and September can be so dramatic for stock players.

On top of the good tidings for retail and jobs, US inflation at 2.9% was the best reading since March 2021 beating economists’ expectations. The Producer Price Index’s drop was even better slipping to 2.2% for the year to July.

Gargi Chaudhuri, chief investment and portfolio strategist at BlackRock, has got it right telling CNBC: “While growth risks have increased, we believe the market has overreacted to a small number of soft data points, not a drastic change to the macro outlook.”

However, if the data disappoints before the Fed’s next meeting across September 17-18, then stocks surely would sell off again and a 50 basis points cut would be more likely. I’m betting that the data won’t be disastrous but I’m not investing much on this hunch. Like the market, I’m keen to hear what the Fed’s boss Jerome Powell says at the Jackson Hole conference late next week. After what is said, there’ll be a lot of rate cut guessing, which I’ll be looking at this time next week.

If there are any silly sell offs, I’ll probably be a buyer as I did like Walmart (a great bellwether company for the US economy) revealing a raised outlook and a good earnings report that beat analyst estimates, sending shares up more than 6%.

To the local story and the S&P/ASX 200 rose 2.49% to finish at 7971 for the week, helped by the tailwinds out of Wall Street and local company reporting that hasn’t spooked the market. This is how AMP’s Shane Oliver reviewed the reports so far: “So far 38% of results have surprised consensus earnings expectations on the upside, which is less than the norm of 40%, but on the other hand 32% have surprised on the downside which is also less than the norm of 41%. So not great, but okay.”

Friday saw both BHP and Woodside have 2% rises but the iron ore miner was off 2% for the week but the oil stock added 1.95% to close out at $26.12. Also, Pilbara Minerals had a good Friday, rising 5.8% but it did lose 6.15% for the week!

But the star stock was Promedicus, up 16.42% for the week to $150.67 after reporting better than expected.

And Magellan had a long overdue good one, up 14.64% to $10.73 after buying nearly 30% of fund manager Vinva, which has been a great performer over the past three years.

Meanwhile, the usual great performer, Cochlear had a bad one, off 9.81% for the week after a slightly less impressive profit report, but it is up 21.75% for the past 12 months.

Finally, what about JB Hi-Fi shares, up 8.5% after the company revealed a fully franked special dividend of 80 cents a share. However, the retailer reported a net profit drop of 16.4% for the 12 months to June 30 and its share price ended the week at an unbelievable $77.39! Harvey Norman shares rose 4.91% for the week and Super Retail put on 6.67%, which was all surprising given fears our economy is slowing enough to justify a rate cut!

What I liked

  1. Unemployment up from 4.1% to 4.2%, which is good for a rate cut.
  2. The labour market mightn’t be helping rate cuts, but it’s also saying “don’t worry about a recession.”
  3. US CPI for the year to July came in at 2.9% versus expectations of a 3% rise and the stock market loved it.
  4. The headline Producer Price Index rose 0.1% month-on-month versus a 0.2% gain expected by economists, while the core reading (excluding food and energy) was flat on the month versus a 0.2% consensus (the softest reading in four months). In year-on-year terms, the core reading gained 2.4%, two-tenths lower than the consensus.
  5. Good US inflation readings helped the Oz dollar rise which helps our future inflation numbers.
  6. US retail sales were up more than expected and jobless claims fell, which reduced recession fears.
  7. Iran hasn’t attacked Israel and long may it remain so!

What I didn’t like

  1. Employment up 58,200 when 20,000 was expected, which is bad for rate cuts.
  2. The Wage Price Index rose 0.8% for the June quarter and 4.1% for the year. It wasn’t too big a rise but I would have preferred it to be a tad lower so the RBA could have less inflation fears.

Betting on a Cup Day cut

The S&P/ASX 200 gain of 2.49% was the index’s best weekly performance for the year and was last doing rises like this in the December quarter of last year, which was a great three months for stock prices.

I’m tipping another good December quarter for 2024, which should roll into some good early months of 2025, with rate cuts powering stocks that were beaten up as interest rates started to rise in 2022 and into 2023.

We just need a couple of months of economic data that shows the US is avoiding a near-term recession and our economy is slowing sufficiently to make the calls of the CBA and Westpac economics team that rates could be cut on Cup Day a chance.

Significantly, Cup Day coincides with the US election and if we can get a cut and a US president without the election dramas of 2020, we stock ‘punters’ could be off to the races with our portfolios.

P.S. I’d like to say that these two events are a safe bet but that would be me being too optimistic! Let’s live in hope, even though hope isn’t really a smart investing strategy.

 

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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

“The Australian labour market is a puzzle. Employment growth for the year to July was 3.2%, compared to an economy growing closer to 1%, the slowest rate in 30 years outside the pandemic… We still maintain our central case scenario for a November start date for the first interest rate cut from the RBA. But we are growing uneasy, given the shortening runway to achieve the data configuration required for the RBA to feel comfortable cutting the cash rate, especially after today’s employment print.” CBA Economics team.

Those hoping for a rate cut in 2024 need some jobs bad news, and fast!

 

Chart of the Week

Unemployment rose from 4.1% to 4.2%, which is good for a rate cut this year but employment rose by 58,200 jobs in July, well above market forecasts for a 20,000 rise, which is not good for rate cuts.

 


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.