Understanding last week’s market action gets down to the Fed’s rate rise decision versus the Trump effect. And while the former is slowing down, the latter (the earnings and economic outlooks) suggests Trump will win.
By the way, I could’ve written this even without Donald heading for the White House but the Dow wouldn’t be at 19,843. It would be up from Election Day but wouldn’t have had the unexpected impact of the Trump love and massive economic expectations of what a world economy could do with Donald at the helm!
Last week, I was pondering what might bring a pullback. The Fed’s expected interest rate rise was a consideration. The experts all argued, “it was baked in” and yes, the Yanks on Wall Street kept buying stocks as the Dow Jones average approached 20,000. However we copped some backwash, as the currency effects on commodity prices outweighed the Trump effect.
To be accurate, even the US market has lost momentum, with this being the fourth day that the Dow has struggled to beat 20,000. And I don’t see enough new news and good news to get the index over this important psychological level in the short term. But things can change.
But hell, the most watched market index in the world has done plenty since Donald Trump won the US poll on November 8.
In case you forgot, the Dow rose 265 points before the election, when the market thought Hillary Clinton was a shoe in. And while the Dow futures was heading for a 1000-point loss, after Donald’s victory speech it all changed. The Dow has shot up 8.3% over that time and even if we’ve had our Santa Claus rally early (though I don’t rule out the Americans giving Dow 20,000 one more old school try before we start popping champagne on New Year’s Eve), the delay in breaking this level suggests market influencers are tempted to take profit.
This has been happening here with material stocks and why wouldn’t short-term players do this, especially as the greenback shot up on the Fed’s decision and commodity prices slipped, as you’d expect. As I write, the Oz dollar is 72.93 US cents, which says it all about the Americans’ second rate rise in a decade!
However, don’t stress, as this is a positive for domestic economic growth and, inevitably, for the stock market, especially if commodity prices can sustain these or even slightly higher levels, which many analysts have signed up to. Remember, the likes of Macquarie have a BHP target at $28. It closed at $25 yesterday.
What shouldn’t be ignored is that the Fed decision not only brought a quarter per cent rise in the official Fed rate but predicted three more rises in 2017, rather than the expected two. And this gave the market a pause to think. The Trump junkies hadn’t focused on the downside of Trump-love, so reality has started to bite a little. That said, I think it’s all healthy and what we’re seeing is the US economy and monetary system heading towards normality, with higher interest rates, inflation and economic growth because without growth happening, with a Trump push added, then three rate rises won’t happen.
Ironically, if the above comes to pass and the US doesn’t grow strong enough to warrant three rate rises, I’ll be looking for a sizeable correction next year. I’m not expecting this but it will be a part of my brief to be on the lookout for it. And that’s why you’re reading this now.
Back home, we lost 0.5% for the week but let’s not forget we are influenced by commodity prices and a higher greenback always hurts those prices. Recall on November 8, our S&P/ASX 200 index was at 5257.8. It’s now at 5532.9 so we’ve pocketed a 5.2% gain in six weeks, which means we do need to acknowledge the Trump impact on our portfolio of stocks for 2016.
Including dividends, we’re up about 10% but from the disastrous lows of February, we’re around 18% higher and this gives us the clue that we should carry into 2017. Stocks (and especially materials) were going higher on better expectations for the world economy and Donald has been cream – a lot of cream – on top of the economic cake!
This week, iron ore prices topped out at $US83.58 – a two-year high! – and the likes of Rio Tinto lost 5.4% over the week. That says it all but it has done well since its February lows.
And don’t forget that all this good Trump news has hit the gold price and that acts as a weight on our market index sneaking higher.
I like the M&A action with APN Outdoor and Ooh Media proposing a tie up and Macquarie leading a consortium for a $7.3 billion bid for Tatts to trump Tabcorp’s $6.8 billion offer.
A big feature of this week was the economic story and in Switzer Daily I went looking for the data dropped over the December quarter so far to try and determine if another negative quarter was possible. I hate the thought that my media mates could pull out the “Recession!” headline, if we get two negative quarters.
I kept count and 14 good economic news stories were discovered for the quarter, versus three bad ones. However I still thought I’d seen more bad news tales on the economy than that, so I investigated more. And what did I find?
Economics is a strange old social science and what I found was a lot of the bad news reported in the December quarter was about the September quarter. The delay in getting stats on, say, building approvals or actual construction, means we hear bad September quarter news in December. And the negative economic growth number of 0.5% was a classic case in point.
I’m tipping a positive December quarter, unless Scott Morrison cuts government spending too hard or if imports surged in anticipation of big growth in 2017. Imports can reduce growth rates in the short term but can power it up in the medium term, if they are capital or business investment goods. A lot of recent imports have been exactly that.
What I liked
- Employment rose by 39,100 in November, after rising by 15,200 in October (previously reported as a rise of 9,800 jobs) – the biggest back-to-back jump in full-time work since March 2011. Full-time jobs rose by 39,300, while part-time jobs fell by 200. Economists had tipped a 15,000 increase in jobs.
- Unemployment rose from 5.6% to 5.7% but it was driven by a rise in the participation rate, which is a positive sign for the economy.
- Foreigners held a record $765.6 billion Aussie shares in the September quarter (or 45.2%) of the total.
- CommSec estimates that total household wealth rose to a record $374,333 in the September quarter, up $6,941.
- The NAB business confidence index rose from +4.3 points to +5.0 points but the long-term average is +5.8 points.
- Australia’s population expanded by 337,821 over the year to June 2016 to 24,127,159. Overall, Australia’s annual population growth rate rose from 1.36% to 1.39%. A rising population is a positive for economic growth.
- Tourist arrivals are up 12.7% on the year, with departures up 4.3%. Tourists from the US have surged by almost 18% in smoothed terms in the past year – the fastest pace of growth in records going back 26 years.
- The NAHB Housing market index in the US rose 7 points to 70 in December – the highest reading on sentiment since July 2005.
- The US Federal Reserve lifted the Fed funds target rate from 0.25-0.50% to 0.50-0.75% in a unanimous decision – it was overdue!
- US producer prices rose by 0.4% in November, to be up 1.3% over the year – the strongest annual gain in two years
- European shares rallied to 11-month highs on Tuesday, supported by a lift in financial stocks. UniCredit, Italy’s largest bank, rose by 15.9% – its strongest growth in six years. This looks like a nice omen for an improving EU economy.
What I didn’t like
- The Westpac/Melbourne Institute survey of consumer sentiment fell by 3.9% in December to 97.3. The confidence index is down 3.5% on a year ago. The survey was conducted between the 5th to the 10th of December so that bad economic growth number and the media around it would have hurt this number.
- The NAB business conditions index eased from +6.6 points to +5.3 points in November but it’s still better than the long-term average of +4.8 points.
By the way
Like with most weeks, my “likes” KO my “don’t likes”, as Dr. John Hewson pointed out a few weeks ago on my TV show. Even though I know I’m biased by my positivity, I do confront really bad news – potential and actual – when it surfaces. On balance, good news has trumped bad news this year and that’s why we’re up 10% (including dividends) and up over 22% since February (if we throw in dividends).
When the bad news starts to beat the good news, that’s when I’ll become a market pessimist but I think we might have a year or two to go until that happens.
Top Stocks – how they fared
[table “245” not found /]The week in review
- I explained whether I think the Trump rally can keep on keeping on [1].
- Paul Rickard answered a common question from subscribers: How do I invest money in the stock market? Read it here [2].
- James Dunn gave you five food companies with exposure to China to consider [3].
- As small- and mid-caps retreat, Tony Featherstone revealed four high-fliers [4] that offer profit taking opportunities.
- Charlie Aitken has been bullish on the outdoor advertising sector, and in an unexpected turn, oOh!Media and APN Outdoor announced a merger of equals. Find out [5] what he thinks about the deal.
- Despite the new super rules coming into effect from 1 July 2017, a TRIS still provides many advantages. Graeme Colley explains everything you need to know [6].
- Our Super Stock Selectors [7] liked Rio and CSL this week but were not keen on Bellamy’s and Medibank.
- Brokers upgraded BHP [8] this week while Regis Healthcare was downgraded. In our second broker report [9], Domino’s Pizza was upgraded but Flight Centre was downgraded.
- Roger Montgomery [10] shared his contrarian view on the home furnishing retailers.
- BAEP’s Julian Beaumont said Aristocrat Leisure [11] has terrific momentum in its business. Find out why.
What moved the market?
- The US Fed, which raised interest rates from a range of 0.25-0.5% to 0.5-0.75% and suggested there may be three rises in 2017 (see chart below).
Calls of the Week
- Donald Trump picked ExxonMobil CEO, Rex Tillerson, as his nominee for Secretary of State.
- oOh!Media and APN Outdoor unveiled a $1.6 billion merger deal. Check out Charlie’s article on the merger [5].
- James Packer’s Crown Resorts agreed to further reduce its stake in its Macau operations and focus on its strong Australian casino business.
The week ahead
Australia
- December 19 – Mid-Year Economic and Fiscal Outlook (MYEFO)
- December 20 – Reserve Bank Board minutes
- December 31 – Private sector credit
Overseas
- December 19 – Markit US Service PMI (December)
- December 21 – US Existing home sales (November)
- December 22 – US GDP (September quarter)
- December 22 – US FHFA home prices (October)
- December 22 – US Leading index (November)
- December 23 – US New home sales (November)
- December 23 – US University of Michigan Sentiment (Dec)
- December 27 – S&P CaseShiller Home prices (October)
- December 27 – Dallas Federal Manufacturing Index
Food for thought
What if Christmas, he thought, doesn’t come from a store? What if Christmas, perhaps, means a little bit more?
– Dr Seuss.
Last week’s TV roundup
- Could we see a Santa Claus rally and what’s the global economy looking like for 2017? To discuss this and more, AMP Capital’s Shane Oliver and FNArena’s Rudi Filapek-Vandyck join the show [12].
- If there’s one threat to the positive outlook for the Australian economy, it could be problems in the property market. For his take on this potential threat, Dr Frank Gelber from BIS Shrapnel joins Super TV [13].
- Is the stock surge losing steam? Contango’s George Boubouras shares his views [14].
- Just how long can the Trump rally last? Martin Lakos from Macquarie Wealth Management and Paul Rickard from the Switzer Super Report join the show to discuss this [15], and the outlook for 2017.
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 also shows how this has changed compared to the week before.
This week the biggest mover was Estia Health, with its short position increasing 1 percentage point to 8.48%.
Source: ASIC
Chart of the week
Yellen’s lot plots their dots!
Source: FOMC
Each Federal Reserve policy maker has shown where they think the Fed’s fund rate should be at the end of the year, over the next few years. The chart above shows that the median FOMC member see rates going to between 1.25% and 1.5% at the end of 2017. That could suggest three hikes – of 25 basis points each – over 2017 (up from two hikes previously). They also see the long-term rate at 3%.
Top five most clicked stories
- Paul Rickard: Help! What do I do with my money? [2]
- Tony Featherstone: Four more stocks to sell [4]
- Charlie Aitken: Things that make you go oOh! OML and APO announce merger [5]
- Peter Switzer: Trump rally – can it keep on keeping on? [1]
- James Dunn: Five food companies with exposure to China [3]
Recent Switzer Super Reports
- Monday 12 December, 2016: Record highs [16]
- Thursday 15 December, 2016: Outdoor Advertising [17]
Season’s Greetings
Have a great Christmas and holiday period and I look forward to our Saturday morning catch up in 2017 and beyond.
Go Australia!
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.