I told you on Monday I was a tad negative and it followed the 1.2% economic growth number for the second quarter in the US. The struggling global economy just didn’t need a disappointing, slower than expected US economy.
But my negativity has swung back to positivity, with the July jobs report pushing the Dow Jones and S&P 500 back into record close territory. So how good were they?
Very good, with 180,000 jobs expected and 255,000 showing up. And while the unemployment rate stayed the same at 4.9%, it was because some 400,000 Americans rejoined the workforce! This is seen as an extremely positive development, which economists see as a strong pointer for the economy generally.
“It’s the second consecutive month where economists have been surprised,” said Andrew Chamberlain, chief economist at US economic research house Glassdoor, noting that the labor market has now seen expansion for 85 months, the largest expansion since the 1990s. (CNBC)
But what about that weaker than expected growth number last week? Well, over the week, a number of economists who analyzed the figures closely pointed out that the problem was the statistical impact of inventories that effectively fell, which brings down the overall growth result.
This can be voluntary because businesses simply aren’t selling their stock or it can be involuntary because sales are beating restocking processes. The latter is a positive sign, while the former is a worrying indicator.
However, because the US consumer was one of the brightest aspects of the growth number last week, economists are expecting a better second-half for the data on economic activity in the States. This jobs report gives that argument a lot of credence.
But my likes continue this morning, with the strength of this jobs report now putting a rate rise from the Fed back into play. And despite that, Wall Street has surged higher. On my TV programs this week, I worried that a good result could create a short-term sell off but I argued it would only be until the traders were swamped by the longer-term investors, who would decide that the US economy is worth investing in.
Happily, both speculators and investors weren’t prepared to argue with these figures or fear an interest rate rise. This could be an eventful step towards the real world starting to replace the La La Land that quantitative easing created, where bad economic news was good stock market news because it kept rates lower for longer.
The Fed might still wait until after the November election – ‘call it Trump insurance’ – but the chart below from Trading Economics shows how concerted the jobs improvement has been. It also shows how roguish that May number of 24,000 was.
[1]This certainly sets us up for a good start to the week for our stock market. And if earnings can surprise on the high side, then we could be off to the races well before the first Tuesday in November (or Cup Day for those who are less interested in that four-legged lottery run in Melbourne each year).
I have to say I didn’t take heart being right about being negative on stocks on Monday, after we lost 1.2% for the week, but as I’ve already revealed, that was then. This is now and I’m back riding that dear old bull.
And despite this negativity for the index, which ended at 5497.4, miners were up 1.4% and energy companies added 2%, as the oil price has had a good couple of days.
I guess the only concern for me out of this week was the fact that the Oz dollar finished over 76 US cents, despite the RBA’s rate cut. This stubbornness will change when the Fed cuts rates, as it will be seen as a plus for Australian economic growth. In addition, specific companies benefit from a lower currency but that’s a good news story for a few months off. I only hope that Donald doesn’t trump this looming better scenario for the economic and stock market outlook.
What I liked
- The US job numbers, which were broad-based and wages were up 0.3%, while hours worked were revised higher.
- The VIX or fear index is at 11, which is a huge low.
- As Charlie Aitken predicted, there was rotation into growth stocks, with the S&P 500 ending at a record high, up 18 points to 2182.87. The Nasdaq added 54 points (or 1.06%) and this is the home of growth stocks!
- The RBA’s predicted growth of 2.5-3.5% for the coming year.
- This RBA quote from the Statement on Monetary Policy: “While the prospects for growth in economic activity are positive, there is room for even stronger growth.”
- In the US, the ISM services index eased from 56.5 to 55.5 in July (forecast 56.0), while the Markit services gauge rose from 50.9 to 51.4 in July.
- Also in the US, personal incomes rose 0.2% in June, to be up 3.4% over the year and personal spending lifted by 0.4% in June, to be up 3.7% over the year.
- The local RBA rate cut was the right thing to do but I hated the dollar response and I’m not sure about the banks’ reaction. I do suspect that the banks have done this to help their bottom line in some way. As Paul Keating once advised: “in the race of life, always back self interest – at least you know it’s trying.”
- Tourists from mainland China and Hong Kong rose to a record 1,389,200 over the past year (up 21.4% over the year) and now well ahead of tourists from New Zealand (1,321,700 visitors over the past year).
What I didn’t like
- Retail sales rose by just 0.1% in June, after a 0.2% lift in May. Sales have lifted 2.8% over the past year. Non-food retailing rose by 0.6% in June and these aren’t great numbers.
- Over the past year, net permanent and long-term arrivals to Australia totalled 262,170 – the lowest level in nine years (March 2007). Population growth is great for economic growth.
- According to the Federal Chamber of Automotive Industries (FCAI), new motor vehicle sales totalled 91,331 in July, down 1.1% over the year but this is off record highs.
- Dwelling approvals fell by 2.9% in June, after falling by 5.4% in May. In trend terms, approvals fell by 0.9% in June and this follows actions by regulators to hose down the hot housing sector. I hope they haven’t gone too hard!
- The German financial services company, Commerzbank, warned that negative interest rates and weak business borrowings were hurting profits. Commerzbank’s share price fell 9.2%, closing at record lows. This is why normalcy returning to the US economy with rising interest rates is probably overdue.
This is what victory looks like for me…
These job numbers are like the Swans, the Roosters, the Waratahs and the Wallabies winning on the same weekend. And I’ll also throw in the Aussie swimmers winning 11 gold medals at Rio, as predicted by the US sports bible, Sports Illustrated!
Bring it on.
Top stocks – how they fared
[table “199” not found /]The week in review
(click the blue text to read more)
- Stop the presses! This week I explained why [2] I’ve become a little negative!
- Paul Rickard updated our Switzer Super Report model portfolios [3]. To the end of July, the income-oriented portfolio is up by 9.68% and the growth-oriented portfolio by 3.50%.
- James Dunn kicked off our coverage of earnings season and discussed [4] the market’s outlook for the top 20 stocks.
- Charlie Aitken explained why [5] the investment case for the US ‘MAFIA’ stocks could be compelling.
- Tony Featherstone said [6] small and mid-caps like Dulux Group, Hunter Hall Global Value and Hotel Property Investments are worth investigating in this low-rate environment.
- The potential for growth in Asia was one reason why Julian Beaumont of Bennelong Australian Equity Partners tipped intellectual property services company, IPH Limited [7].
- Barrie Dunstan explained why [8] the retrospective nature of the super changes is cause for concern for SMSF trustees. But there’s still more debate to be had in government.
- The brokers [9] liked Graincorp this week but downgraded APA Group. In our second broker report [10], Fortescue was in the good books but Seven West Media copped a downgrade on the back of its announced cost pressures.
- And our Super Stock Selectors [11] liked Rio Tinto this week while Metcash featured on the dislikes list.
What moved the market
- The market didn’t expect the big banks to pass on a partial rate cut to borrowers.
- Solid gains in the oil price helped lift Wall Street and shares locally.
- The Poms cut interest rates on the back of post-Brexit blues, and UK and European stocks went higher.
The week ahead
Australia
- Monday August 8 – Job advertisements (July)
- Tuesday August 9 – NAB business survey (July)
- Wednesday August 10 – Consumer confidence (August)
- Wednesday August 10 – Housing finance (June)
- Wednesday August 10 – Speech by Reserve Bank Governor
- Friday August 12 – Lending finance (June)
- Friday August 12 – Credit & debit card lending (June)
Overseas
- Monday August 8 – China trade (July)
- Tuesday August 9 – China inflation (July)
- Tuesday August 9 – US NFIB business optimism (July)
- Wednesday August 10 – US JOLTS (July)
- Thursday August 11 – US Export & import prices (July)
- Friday August 12 – China monthly data (July)
- Friday August 12 – US Retail sales (July)
- Friday August 12 – US Producer prices (July)
- Friday August 12 – US Consumer sentiment (August)
Calls of the week
- The RBA cut the cash rate by 25 basis points to a historic low of 1.50%.
- Malcolm Turnbull said that the big banks will need to appear in front of the House of Representatives Economics Committee at least once a year to explain their dealings.
- And in this week’s SSR, Charlie Aitken said there’s a compelling case [5] to invest in the US ‘MAFIA’ stocks.
Food for thought
- “If you are not willing to risk the unusual, you will have to settle for the ordinary.” – Jim Rohn
Last week’s TV roundup
- Is there a great rotation going on from defensive to cyclical stocks? To discuss, Charlie Aitken of Aitken Investment Management joins the show [12].
- Switzer Super Report expert Paul Rickard analyses the market’s performance during July [13].
- The RBA cut the cash rate in August to a record low of 1.5%. To discuss [14] the market’s reaction is chief economist at BetaShares, David Bassanese.
- Reporting season is upon us and there is plenty to talk about! Michael McCarthy of CMC Markets and Roger Montgomery of Montgomery Investment Management join the show [15].
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 Isentia, with its short position increasing by 0.87 percentage points to 7.72%.
[16]Source: ASIC
My favourite charts
You want fries with that?
[17]It’s probably not good for our waistlines, but this week’s retail data showed that sales at takeaway food outlets rose by 0.4% in June – the strongest quarterly result in 6 and a half years. Good news for Domino’s?
Lower rates for longer?
[18]Here’s a snapshot of the interest rate since 1990. As you can see, we’ve gone from levels around 17% to a record low of 1.50%!
Top 5 most clicked on stories
- Tony Featherstone: 10 stocks for dividend seekers [6]
- Peter Switzer: Newsflash! Peter Switzer has become a little negative! [2]
- Paul Rickard: Portfolios surge in July [3]
- Charlie Aitken: Is the great rotation from defensives to cyclicals about to commence? [19]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [9]
Recent Switzer Super Reports
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