For quite some time I’ve been arguing that the December quarter could be when the stock market rebound could get serious. And in a week where two big market-moving events lie ahead, I know I’ve only got 54 days left in the year to be right!
So far, the quarter has been heartening for a market optimist like me, with the Dow Jones Industrial Average up in October by the biggest amount since January 1976, rising 14%. By comparison, the S&P 500 and Nasdaq gained about 8% and 3.9% respectively for the month.
Why did the Dow do so well? First, there’s only 30 stocks in the index and they are quality businesses. And the tech ones i.e. Apple and Microsoft, actually make profit.
Interestingly, right now, the focus is so much more on quality non-tech businesses that even the biggies of the tech world are out of favour.
CNBC recently reported that “a ‘massive bifurcation’ is underway between mega-cap technology stocks and the rest of the market, says Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management.
Slimmon thinks big names have more to fall because their earnings are on the way down, especially if a recession shows up in the US. He says the big names are “trading at a premium to the rest of the market.”
Apple was down 9.74% over the past five days. Microsoft was down 5.35%. Amazon was down 12.14%, but, interestingly, the latter two had a nice rise on Friday, while Apple was flat. Why was Friday significant? Well, that’s when the news broke that China was pulling back on many of its Covid restrictions. This excited Wall Street and will do so here today.
China coming out of lockdown is a plus for the world economy and commodity prices and stocks such as BHP and Rio will be chased as a consequence.
Of course, Slimmon could be right short term about mega-cap tech stocks but wrong medium term. And you have to work out what kind of investor you are and how and when you might want to increase your exposure to the tech sector.
Remember, the stock market tends to be six months ahead of reality and the really important real world event that will spark a big rally in share prices will be a good inflation number. This is why Thursday’s Consumer Price Index in the US is important to my December quarter call for a stocks rebound.
If we don’t see a better-than-expected drop in US inflation for October this week, the focus will go to the November number released on December 13, which would still give us time to see a good old Santa Claus rally to close out 2022.
Interestingly, given our S&P/ASX 200 is down only 9.19%, a big December bounce back could actually take us positive for the year, which would be an irony. Mind you, I’m expecting a small negative for the year, provided inflation shows a decent fall either next week or in December.
This chart shows the current uptrend, which would get a big lift if the Yanks get a decent inflation number before year’s end.
ASX 200 YTD
Jerome Powell made me less positive about my December call last week with his comments after another 0.75% rate rise. Consensus before his comments was that in December there’d be a 0.5% or 0.25% rise ahead of a pause or even a stopping of these hikes in rates.
However, Jerome kept the jawboning going to make sure that irrepressible US optimism didn’t take off on stock markets until a significant drop in inflation happens. This underlines how important Thursday’s CPI is for future US interest rate rises, the eventual resurgence of stocks and the dropping of the greenback, which should happen in concert with a rising $A.
If the CPI disappoints, stocks should drop again, but right now markets like the implications of China dropping its lockdown toughness. This explains why commodity prices have been on an uptrend since Friday.
Today, BHP is up 4.25% ahead of the close, while Rio and Fortescue are up over 3%.
So when does tech take off? The best answer I can come up with is this: when inflation produces a surprise data drop. On tonight’s TV show, AMP’s Diana Mousina thinks we’re getting close to a bigger-than-expected fall in the US inflation rate, given what AMP’s Pipeline Indicators have been suggesting for months.
CommSec’s Ryan Felsman surveyed what Wall Street smarties are thinking about inflation and here are his main points:
- The latest National Federation for Independent Business (NFIB) small business optimism survey found the proportion of companies looking to raise their prices in the next three months eased from 32% to 31% in September 2022, the smallest share since January 2021.
- US manufacturing activity grew at its slowest pace in nearly 2½ years in October as rising interest rates cool demand for goods.
- Mortgage applications have fallen to the lowest level since 1997.
- Home prices in 20 large US cities slid 1.3% in August 2022, the most since March 2009, according to the S&P CoreLogic Case-Shiller index.
- While GDP expanded by 2.6% after contracting in the two previous quarters, personal consumption (the biggest part of the US economy) lifted at a modest 1.4% pace, slowing from the June quarter.
“Overall, it suggests that weakening consumer demand, the deteriorating economic outlook and rising inventory levels are making businesses more cautious and suggests pricing power is waning,” Felsman concluded. “If so, this indicates inflation could slow through the first half of 2023.”
I also liked this from Felsman: “A recent Wall Street Journal article by Fed “insider” Nick Timiraos hinted that some officials are concerned about the pace of rate hikes and had opened the possibility of a smaller 50 basis point rate hike in December. And the recent dialling-back of rate hikes by both the Bank of Canada and the Reserve Bank of Australia added to market expectations ahead of the November meeting that the Fed may rein in its policy aggressiveness.”
If inflation comes in better than expected in a week when the mid-term elections are likely to render President Joe Biden a lame duck leader, this sets up 2023 for another third year of a presidency rebound year for stocks, where tech will eventually add significant momentum.
The whole tech sector could take two years to get fully on board with a bull market, but those who are patient could make some seriously good money, especially if they’re hedged.
On Thursday’s TV show, Morgan’s Michael Knox said he saw a much higher Oz dollar and lower US dollar by year’s end. (See the interview here: https://www.youtube.com/watch?v=LuOuq_uoQhY [1] )
The ARK Innovation Fund was the poster child fund for the tech boom of 2020-21. One day it will ride higher and the chart below shows what’s possible with tech, but you just might have to be very patient.
ARKK
This is not advice but I think an educated guess says that when rates stop rising, there’ll be an inevitable rotation out of the Dow-like stocks into growth. That’s when the patient who are hedged will be rewarded.
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.