Switzer on Saturday

Jerome plus data have made our Christmas!

Founder and Publisher of the Switzer Report
Print This Post A A A

Like a gift from Santa Claus, who this year is Jerome Powell of the Federal Reserve, stocks have surged this week, reinforcing a trend that started seven weeks ago for Wall Street. And while we’ve been limping higher in sympathy with the Yanks, this week we totally joined the positivity party, when our latest jobs report gave some reason to believe that our RBA might be close to the top of its rate rise cycle.

For some time, I’ve been telling you that our stock market future would be data-dependent, especially with respect to inflation-related statistics, and then the decision of the key central banks — the Fed and the RBA. So, this week’s revelations from Mr Powell after the scheduled interest rate meeting (when he shocked the bears with his announcement that his team who vote on rates are no longer locked into rises, and that in the not-too distant-future three cuts next year can’t be ruled out) excited stock markets.

This one-week chart of the S&P 500 shows how the past five days were greeted by US stock players, with the index up 2.7%, making the monthly rise 4.76% before the overnight close. And since 27 October, this great index snapshot on the attitude towards the US economy and the future health of corporate America is up 14.5%!

Over that same time, our market is up a nice 9.9%. But you can see how important this week was when you know that the past five days delivered a 3.4% rise. Provided the next two CPI readings for inflation come in as expected or better, then the recent rises will look safely locked in, give or take a pullback or two.

You should note that the Dow hit its all-time high this week, and the S&P 500 is less than 2% off its own record top.

It makes sense to think that some profit-taking is likely from big players who might want to ensure these December quarter gains aren’t lost because of a surprise rogue piece of data, a dumb comment from a Fed voting member or a geopolitical shock. But given what we’re seeing data wise, any sell-off would be short-lived and be a buying opportunity.

Also, it should be pointed out that rebalancing for key indexes is looming. “Once complete, Uber will be part of the S&P 500, and DoorDash and MongoDB will be added to the Nasdaq-100. One concern for this rebalancing is some stocks could end up having outsized weighting going on the indexes,” expert market watchers told CNBC.

To the local story, and the S&P/ASX 200 rose 247 beautiful points (or 3.4%) to finish at 7442.7. This is how AMP’s Shane Oliver saw this week’s trade and what might lie ahead: “The US share market is now just 1.6% below its record January 2022 high, which had been reached before the inflation and interest rate scare took off in earnest. The positive global lead and the flow on from the Fed’s pivot to expectations for RBA rate cuts next year, saw the Australian share market surge around 3.6% for the week with property, IT, material, and health stocks leading the charge.  This has substantially improved its year-to-date gain to around a respectable 6%, although it remains a relative underperformer. Bond yields fell further on the back of falling interest rate expectations for next year and they are nearly back to where they started in 2023.”

And on what might lie ahead, Shane said: “Shares remain vulnerable to concerns about sticky inflation, recession fears, worries about the Chinese economy and geopolitics but they are likely to see more upside in the months ahead as inflation continues to ease, the monetary policy environment turns progressively less threatening and then more supportive and positive share market seasonality remains in place with the Santa rally normally kicking in from about now.  So, while we should expect lots of bumps along the way, our base case remains that global and Australian shares can trend up.”

Stocks-wise, iron ore, copper and gold had a good finish to the week, but lithium was the standout star. Liontown Resources added 5.07% for the week, while Pilbara Minerals put on 4.26%.

Interestingly, Sigma fell 25.8% this week, after a 36% surge on Wednesday, as some groups questioned if the ACCC would give the merger the nod. The chart below shows how nasty the stock market can be for speculators.

What I liked

  1. Jerome Powell’s effort.
  2. The overall message from the jobs report, with unemployment rising from 3.8% to 3.9%, but 61,500 jobs were created. This implies interest rates are working but not setting us up for a recession.
  3. The Government’s mid-year review (MYEFO) confirmed a further improvement in budget projections, with the deficit for this year now projected to be just $1 billion (down from $14 billion back in May), thanks to stronger personal and company tax collections. This will make tax cuts in the May Budget very likely, especially with an election due by mid-2025.
  4. This from NAB’s CEO Ross McEwan: “While the Australian economy is slowing, it is still growing and Australia is in a good position,” he told NAB’s annual meeting. “We are cautiously optimistic about the future but also alert to the geopolitical tensions at play.”
  5. This news for commodities and especially lithium: “Other lithium and rare earths plays; they rallied on Friday as traders bet a lower US dollar will boost commodity prices.”
  6. US retail sales came in stronger than expected. Instead of seeing this as a threat to inflation, it was seen as a sign that the US should avoid a recession.
  7. US November consumer price inflation came in roughly in line with expectations falling to 3.1%.

What I didn’t like

  1. Consumer confidence rose slightly in December on the RBA rate pause but remains depressed and business confidence in the NAB survey fell, albeit business conditions are still okay but also falling. All things being equal, this is consistent with soft growth.
  2. Australia’s population rose by 2.4% in 2022-23, its fastest pace since 1956, driven by record immigration of 518,000 people, with students on 1 year or more visa’s being a big driver.
  3. News that China isn’t rushing into a big fiscal stimulus and Chinese activity indicators for November were mixed. I want to see them kick higher in 2024. China has deflation right now!
  4. Eurozone industrial production fell again in Octoberand is down 6.6% year-on-year, highlighting the softness in the Eurozone economy. We need the EU to add to global growth in 2024 to help our export sector, which then helps our overall economy.

All I wanted for Christmas

This stock market rally powered by falling inflation, the expectation of falling interest rates next year and the likelihood that we get a slowdown but no recession, both here and the US, could go down as one of the best stories for central banks in their history of fighting inflation.

Of course, these are early days in the market rebound, which I’ve been tipping, but the signs are promising for growth, tech, and commodity stocks, as well as smaller cap companies, which should be good news for the S&P/ASX 200 index. Our market is up 7.1% year-to-date and only 4.1% for the past 12 months, while the S&P 500 is up 23.1% year-to-date and 20.8% for the year!

I suspect 2024 will be catch-up time for our market. All I can say in this final Saturday Switzer Report for 2023 is “Bring it on!”

Switzer This Week

Switzer Investing TV

Switzer Report

Switzer Daily

The Three Weeks Ahead

This is what AMP’s Shane Oliver will be watching over the festive period until statisticians and we’re back at work around January 15.

  • In the US, expect a rise in home builder conditions (18 Dec), weaker housing starts (19 Dec), a rise in consumer confidence (20 Dec), soft underlying durable goods orders and a further fall in core PCE inflation (22 Dec), continued softness in the manufacturing ISM and falls in job openings (both 3 Jan), further softening in payroll jobs growth (5 Jan) and a slowing December CPI (11 Jan).
  • In Europe, expect continued softer inflation (5 Jan).
  • The Bank of Japan (19 Dec) will probably leave rates on hold as wages growth is still too low, but it will likely signal that it’s getting close to rate hikes. Japanese inflation (22 Dec) is likely to fall to 2.8%yoy but with core inflation unchanged at 2.7%.
  • Chinese December trade and inflation data will be released on 8 January, with prices likely to remain in deflation.
  • In Australia, the minutes from the last RBA meeting (Tuesday, 19 Dec) will likely reiterate the RBA’ concerns about still high services inflation, inflation expectations and the tight labour market but also indicate that whether rates go up again will depend on global developments, jobs, consumer spending and inflation data to be released before the February meeting. Our view is that lower December quarter inflation data and growing evidence of softer economy will head off another rate hike, albeit the risk is still high. On the data front credit growth (29 Dec) is likely to remain soft, Core Logic data for December(2 Jan) is likely to show a further slowing in home price growth to 0.5%mom with prices up 8.4% for the year, November retail sales (9 Jan) are likely to bounce on the back of Black Friday and Cyber Monday sales, the November CPI Inflation Indicator is likely to slow to 4.6%yoy (from 4.9%) as high year ago increases drop out and job vacancies for November are likely to show another fall (both due on 11 Jan).

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

Chart of the Week

The November Jobs Report with a rise in unemployment increased expectations that the RBA’s interest rate policy was having an impact on the economy that might mean inflation will keep falling, like we’re seeing in the US. The stock market lapped up this statistical revelation.

Quote of the Week

It had to be the hints from the Fed boss, Jerome Powell, on the subject of interest rate cuts.

“People are not writing down rate hikes” in their latest economic projections, Fed Chair Jerome Powell said in a press conference following the end of the central bank’s final policy meeting of the year. “That’s us thinking we’ve done enough,” he said, adding that rate increases were “not the base case anymore.”

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.