Switzer on Saturday

More sell offs likely, but I like what I see

Founder and Publisher of the Switzer Report
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The greatest lesson and insight from this week’s brutal market sell off (and then the rebound that produced the best day since November 2022 for the S&P 500) was the prevailing market belief that there’s another leg up for stocks.

How it will come about isn’t 100% clear but I suggest it will happen, linked to a slowing US economy and a September rate cut, followed by more cuts. Then the selection of a new US president should set the scene for more rotation into stocks or companies that will benefit from lower interest rates and then an improving economy, because of those lower rates.

Of course, what’s going to be critical is that the economic data comes through and tells Wall Street that the US economy is heading for a soft landing, or, at worst, a technical recession that would be seen as a shallow contraction.

That’s the future, but what about overnight for US stocks? Happily, the bounce back didn’t dissipate into another dumping, with all three key indices managing a positive close after the most volatile week of the year to date. But like the rest of the year, the eyes of investors go back to data drops.

Remember, this week saw the S&P 500 nearly fall into correction territory, which would mean a 10% drop since the all-time high of 8144.70 only on August 1! Reinforcing the negativity was the Volatility Index, also called the ‘fear index’, which reached heights not seen since the Covid Crash or the GFC stock market rout!

Given the magnitude of the collapse in stocks and then the resurgence, you know the stocks scene this week was driven by short-term players, computer-linked trading and speculators.

Jay Hatfield, CEO of Infrastructure Capital Advisors, summed it up neatly for CNBC by saying it looked like a “hedge fund theme.” Then he added: “So, it makes sense that we bounce back. A volatile sell off and bounce back is just normal August [and] September behaviour; thin markets, hedge funds gone wild and irrational moves down. The recent market activity has no bearing on our long-term outlook.”

That’s exactly my position. Ultimately, it will be the upcoming economic data and the Fed’s reaction, as well as commentary, peppered by how the bond market responds to that data, that will determine the course of stocks.

If I was a punter, I’d punt off my ‘soft landing scenario’ and be a buyer of dips. For one part of my portfolio, I will be. However, for the core and big investments I’ll wait to see if the data is trending away from the recession scenario that spooked the market this week.

What the stock markets of the world want to see is the US Consumer Price Index out on Wednesday that should confirm that a September rate cut is the certainty it appears to be. If, however, it falls too steeply, it could resuscitate recession fears. On that subject, Thursday’s US retail sales and industrial production will be scanned carefully for signs that the fears earlier this week were justified or not. I’m hoping it’s not but it’s why I’m expecting market volatility until the recession concerns are KO’d.

To the local story and the S&P/ASX 200 had a great Friday rising 1.25% (or 95.70) points, but it gave up 2.08% over the week to end at 7777.70, which looks like a luckier number than 6666.60 (regarded as the devil’s number) — thank God! Clearly, we were helped by the overreaction to the jobless claims number but maybe Wall Street is sensibly rethinking last week’s crazy response to the jobs report.

This time last week I reported that US employers added just 114,000 jobs in July — 35% fewer than expected — and unemployment at 4.3%, was the highest since October 2021. But it was only one bad report, and the market reaction was an overreaction. If the Yanks get another bad one, then a sell off is understandable but the extent of the dumping of stocks needs to be measured. But that’s a story for three weeks’ time and the next US jobs report.

Back to our market, and on Thursday AMP spiked 13.3% on a better net profit. Wisetech Global put on 2.1%, which wasn’t a bad effort given it was a negative day, but it was only up for the week rising 0.04%. However, Friday changed the week’s mood, with tech stocks getting re-loved!

This is how the SMH’s Brittany Busch summed it up: “The rally was led by family tracking app Life360, which climbed 18 per cent to hit an all-time high after announcing an increase in revenue and more than 70 million users in its mid-year report. WiseTech Global (up 2.7%), Xero (up 2.6%) and data centre operator NEXTDC (up 1.76%), all posted solid sessions.”

I also liked BHP and Rio Tinto up 1.6% and 2% respectively and Fortescue rising 2.1%, which I hope is a sign for the gains we expect for the year ahead. Meanwhile, the 3.2% gain for South32 might be another good omen for materials, which are expected to benefit from the rotation out of financial and other big blue chip stocks that have surged this year.

A surprise for the market was News Corp, which is planning to sell Foxtel. The stock rose 7.6% on the news. It was overall a good day for the Murdoch family, with REA rising 6.8%.

In the losing department, QBE lost 1.71% on Friday and 5.31% for the week on a lower profit report. Another big loser was Mirvac. It fell 9% on Thursday after it forecast lower earnings for the 2025 financial year, following a 5% dip in its first-half operating profit. But Friday brought some better news with the share price coming back 2.67% leaving it at $1.97.

 What I liked

  1. Despite the scary sell off in US stocks that infected our market, I like the fact that as of Friday, while the S&P 500 is below its 50-day moving average, more than two-thirds of the stocks in the index remain above their 200-day moving averages. That’s a good sign for the health of overall market.
  2. The RBA no rate rise decision and the CBA and Westpac tipping a Cup Day rate cut!
  3. The Olympics and our great athletes.
  4. ANZ job ads fell 3% in July and are down 20.8% on a year ago, pointing to slowing jobs growth and rising unemployment. This should help a rate cut happen.
  5. The US ISM services number and the jobless claims figures.
  6. 91% of US S&P 500 companies have now reported June quarter earnings. The results are good but have been more mixed from tech stocks. 78.6% of companies have beat earnings expectations, which is above the norm of 76% but below the experience of the last reporting season. Consensus expectations for earnings growth are now 10.4% year-on-year, up from 7.8% at the start of the reporting season.

 What I didn’t like

  1. The unwinding of the yen carry trade, which was behind the 12.4% fall in the Japanese stock market and spooked other global stock markets. Later it soared 11%.
  2. The overreactive bond market.
  3. Eurozone retail sales and German factory orders were weak in June.
  4. The oil price was up over 4% for the week on continued fears that Iran could attack Israel after the assassination of Hamas leader Ismail Haniyeh in Tehran last week.

The local watches this week

Here in Oz we need to see economic data confirm that inflation is heading down and unemployment is going up, so the Wage Price Index data on Tuesday will be important for the future course of inflation. But the big watch will be on our jobs number on Thursday, where 20,000 new jobs are tipped by economists. To hose down fears that the RBA could still raise interest rates, unemployment has to rise from its current 4.1% level.

 

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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

Following the RBA decision not to raise rates and stay on hold, I like this from the CBA economics team: “Our base case sees the RBA on hold until the November Board meeting when we expect the RBA to commence an easing cycle.”

 

Chart of the Week

US Jobless claims should not have meant so much to the market but they did and it followed better than expected an ISM services number.

This is how Shane Oliver explained it:  “The July services conditions ISM improved, including for employment, contrasting with weakness in the manufacturing ISM. And initial jobless claims fell with the impact of Hurricane Beryl unwinding. However, the trend remains up. Both helped ease fears of a rapid deterioration in the US economy though.”

 


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.