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I don’t like to gloat but those out there writing off the US economy – the most important economy that gave credibility to anyone not wanting to dump stocks – just got a kick in the pants. And for those who have rudely given it to me over my cautious optimism, all I can say modestly is – eat my shorts!
Why am I so caution-free with my insults? Well, when the economists’ forecasts had 175,000 jobs for the June jobs report and then 287,000 show up, that’s a great win for the good guys. Unemployment went up from 4.8% to 4.9% but that had to be driven by a rising participation rate, which means more Yanks went looking for work. We economists know this as another good sign.
Not surprisingly, the S&P 500 broke through its record high of 2130.82 but finished at 2129.90, up 32 points (or 1.53%).
And it brought good news for our market on Monday with materials going higher. You can see that there has been a good global rally for many resources and related stocks lately and that price pick up has to come from those betting that the global economy might come in better than expected. That recession talk in early 2016, which took stocks and commodity prices down to scary levels, is now being seen as an overcooked scenario and we’re seeing a reverse situation. However, the enthusiasm to sell in January and February was a lot stronger than the keenness to buy and that’s understandable, with a lot of potential headwinds out there. I’d guess if there was no Brexit and concerns over a potential President Donald Trump out there, we could be off to the races with a much bigger rally for stocks.
Don’t forget the US is the litmus test for quantitative easing. It must grow strong enough to require and to cope with a few interest rate rises between now and the end of 2017.
Is there any reason to be cautious about this great jobs news? Yep, because the May number of 38,000 was revised down to an unbelievable 11,000! But there is a rosier way of looking at this bad figure and that’s putting it into a three-month trend. And here economists say a good pace of job creation is revealed.
Okay, I’ll buy that, after all I’m an optimist, but I’m also an economist and a financial commentator who’s seen a lot of false dawns on stock markets, so I still want to see a few more months data before I get too enthusiastic. My mate Michael McCarthy from CMC reminded me on Thursday night that he still thinks our S&P/ASX 200 index at 5900 is still his call for some time this year and he’d love this US jobs report.
The market also loved the news and took the fear index or VIX down to a one-month low of around 13.5, which says a lot about the impact of this much waited for economic indicator – 287,000 jobs!
Europeans loved it because it knows how important the US economy is to global growth. And with the Brexit gremlins in their closet, the Yanks have to deliver or we’ll see stocks slump big time. The German DAX was up over 2% but get this nice little one for our stock market on Monday: the STOXX Europe 600 Banks index was up over a big 3.5%! This has been a leading indicator for stocks in the past but in simple terms it should be good for our bank stocks and we know when they rise the market index gets a huge leg up.
What I liked
- That US job number and what potentially it could mean for the long-tern trend for stocks.
- Staying in the US, the ISM non-manufacturing index rose from 52.9 to 56.5 in June – a 7-month high. Across the sub-indices, new orders, employment and business activity all recorded healthy gains.
- The Fed minutes clearly had a dovish tone this week “and given the June meeting took place before the surprise Brexit vote, it’s unlikely the Fed will be looking to lift rates in coming months,” said CommSec’s Craig James. Add these good growth numbers to a Fed that isn’t trigger happy to raise rates yet and it helps bulls.
- Tourists from mainland China and Hong Kong rose to a record 1,366,500 over the past year (up 21% over the year) and now well ahead of tourists from New Zealand (1,314,300 visitors over the past year).
- Locally, the RBA not cutting interest rates, which I hope says it agrees with me that our economic outlook is pretty good so no cut is needed. However, if inflation and external news pushes them, they will cut again.
What I didn’t like
- Local retail sales rose by 0.2% in May after a 0.1% lift in April. Sales have lifted 3.4% over the past year. Non-food retailing fell for the first time in five months, down by 0.1% in May. This May number was the weakest in 16 months. There are reasons for a cautious consumer but I’ll be watching this indicator closely.
- The ANZ/Roy Morgan consumer confidence rating fell by 0.9 % to 115.8 in the week to July 3 and I’d blame election stuff.
- The election result. We didn’t need another possible ‘black swan’ last Saturday night with the possibility of the Coalition losing power at that point in time. The dragged out week that has followed must have an impact on confidence.
- The Senate and the weak position of Malcolm Turnbull’s Government, if it gets up, has pushed the S&P credit ratings outfit to put us on negative credit watch, which could mean we could lose our AAA-rating. The only good thing is that it might make Labor, the Greens, Nick Xenophon, Derryn Hinch, Pauline Hanson and Jacqui Lambie economically responsible. Can you picture that?
We’re in the hands of a Senate that they tell me is less feral than the previous one, which included the poo-throwing Ricky Muir. Even so, I really wish our collective voting intentions came up with an upper house that we could be unashamedly proud of. That might come when our leaders lift their game.
Anyway, let’s toast the US job numbers and pray we can get a trend of positive economic indicators that justify being long stocks.
Top stocks – how they fared
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The week in review
(click the blue text to read more)
- I explained why data out this week [1] was crucial for stocks in 2016.
- Paul Rickard [2] reviewed the Switzer Super Report model income and growth portfolios. For the year, the income portfolio is up a touch over 3%.
- Barrie Dunstan said the start of the new financial year is a great time to review your investment strategy and shared some useful tips [3].
- Gary Stone consulted the charts [4] for direction on where the ASX 200 and S&P 500 are headed. He also gave his take on Woolworths and CSL.
- Charlie Aitken said an investment in gold [5] is becoming more attractive during these uncertain times.
- In the struggling mining services sector, Tony Featherstone [6] explained why you might consider WorleyParsons, UGL and RCR Tomlinson.
- Melanie Dunn told you everything you need to know about annuities [7].
- The brokers [8] upgraded Caltex and Kathmandu and downgraded Vocus Communications. In our second broker report [9], Suncorp and Boral were in the good books.
- Our Super Stock Selectors [10] liked Transurban Group and BT Investment Management but disliked ANZ.
What moved the market
- The prospect of a weakened government dampened investor sentiment.
- Wall Street was supported by the FOMC minutes, which suggested rates would stay lower in the coming months. The local market followed suit.
- Brexit worries started to crystalise this week with European stocks selling off and the pound tumbling to a more than thirty-year low.
- And investors drove up safe haven assets like gold.
The week ahead
Australia
- Monday July 11 – Housing finance (May)
- Tuesday July 12 – Weekly consumer confidence
- Tuesday July 12 – NAB Business survey
- Tuesday July 12 – Credit & debit card lending (May)
- Tuesday July 12 – Speech by Reserve Bank official
- Wednesday July 13 – Westpac consumer confidence (July) sentiment
- Thursday July 14 – Employment/unemployment (June)
- Thursday July 14 – New vehicle sales (June)
Overseas
- Sunday July 10 – China inflation (June)
- Tuesday July 12 – US Wholesale inventories (May)
- Wednesday July 13 – US Import/export prices (June)
- Wednesday July 13 – US Federal Reserve Beige Book
- Thursday July 14 – US Producer prices (June)
- Friday July 15 – US Retail sales (June)
- Friday July 15 – US Consumer prices (June)
- Friday July 15 – US Industrial production (June)
- Friday July 15 – US Consumer Sentiment (June)
- Friday July 15 – China monthly data (June)
Calls of the week
- Charlie Aitken said he’s bullish on gold [5] as it enjoys its resurgence as a safe haven investment.
- NSW Premier Mike Baird announced NSW would be the first state to ban live greyhound racing from July 1 next year.
- Crossbencher Bob Katter said he’d back PM Turnbull in the event of a hung parliament, but warned that if union bashing ensued, all bets were off!
- And Standard & Poor’s downgraded Australia’s credit outlook from ‘stable’ to ‘negative’ – just to add a little more pressure to Turnbull of late!
Food for thought
Leaders must be close enough to relate to others, but far enough ahead to motivate them
– John C. Maxwell
Last week’s TV roundup
- Can we trust the worst of these Brexit blues are behind us? Michael McCarthy of CMC Markets joins the show [11].
- Lance Lai of Accountancy Invest explains what the charts [12] are saying about the markets on Super TV.
- For his views on global growth, markets and whether the RBA will cut rates again, David Bassanese [13] joins the show.
- Charlie Aitken called the Brexit a black swan event, so what does he call this election, and could its outcome hurt the stock market? Find out here. [14]
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 one of the biggest movers was Cover-More Group with a 1.06 percentage point increase in the amount of its ordinary shares sold short to 9.67%.
[15]Source: ASIC
My favourite charts
Lance Lai – bull of the ASX 200?
[16]On the show this week [12], King of charts Lance Lai said the technical patterns are telling him the market’s set for a rebound higher! The chart shows the 200-day moving average (yellow line) has bottomed out and is slightly trending up.
China trend Australia’s friend
[17]The China tourism boom continues to surge higher, with the number of tourists to Australia from China and Hong Kong reaching near 1.4 million (1,366,500 over the past year). That’s up 21% over the year and better than our friends across the ditch at 1,314,000 visitors over the year!
Top 5 most clicked on stories
- Peter Switzer: Could this prove to be the most important week for stocks in 2016? [1]
- Charlie Aitken: Brexit – a black swan event with opportunity [18]
- Paul Rickard: Income portfolio performs strongly in June [2]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [8]
- Charlie Aitken: Bullish on gold [5]
Recent Switzer Super Reports
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.