What the hell is going on?
What just happened? Let’s recap quickly. The Coronavirus KO’d Italy. Saudi and Russian leaders thought an oil fight was a good idea and oil prices fell 30%! WHO tells us we have a global pandemic! The EU doesn’t cut interest rates! Donald Trump bans European travellers for a month! And the end-result was the negatives completely KO’d the positives of rate cuts and stimulus packages.
As Homer Simpson would put it: “Doh!”
As the graph below shows, these are the five days we’ll never forget, unless dementia wipes it from our brains!
As you can see above, Friday finished with an overdue comeback, up 4.42% (or 234 points), but we still lost nearly 11% for the week and around 22% since the Coronavirus started spooking stocks on February 21.
Wall Street followed us and the Europeans, who finished on a high and we should be in the bottoming process for the key market indices. However, experience tells me that some pain-in-the-neck hedge fund managers will try for another couple of sell offs. And given the lack of ‘gifted’ international leadership right now, there could be a couple of curve balls thrown by people, who one day will be branded as incompetents in a crisis or simply plain idiots!
Here’s an example, as reported by the illustrious Financial Times: “Christine Lagarde triggered a bond market sell-off on Thursday as she launched a package of measures to alleviate the economic chaos caused by the spread of coronavirus, saying it was not the European Central Bank’s role to respond to movements in government debt markets.”
Her predecessor, Mario Draghi, became famous for telling us that the ECB would “do whatever it takes” but Christine, a Frenchwoman, looks less accommodating – and we paid the price!
Christine tried to back away from her unwise blatherings and that helped but it was too little too late. Overnight, former Treasurer Wayne Swan criticised the collective international leadership with this crisis, compared to the GFC experience and he’s spot on.
A big mistake, which disappointed the market, was Donald not turning up with a bazooka of an economic stimulus package. It was a gamble that didn’t pay off.
The $17.6 billion Aussie package unveiled by the Morrison Government was a good first start and the Federal Budget will undoubtedly have to do some more work if the infection and death rates in the US and Europe have not abated.
And those numbers will be the crucial ones that will turbo-charge any significant stock market rebound.
A Trump stimulus package would have helped – the market would still have fallen, but not by as much.
So we’re now in the bottoming process where we see ups and downs. Overnight, the Dow was up over 1,900 points but experience tells me that this newfound optimism will be tested. The following is a good take on history: “Volatility, I always remind people, means big moves in both directions,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “After as big of a rout as we’ve seen in the last 30 years, it’s not at all surprising to see at least a little bit of a bounce.” (CNBC)
I promised volatility at the beginning of the year and I was telling my financial planning clients that we’d be going more defensive in March-April as the US election campaign hotted up – but I didn’t see a black swan called the Coronavirus! Damn black swans!
So what helped overnight?
Try this newsflash that Treasury Secretary Steve Mnuchin let it be known that the White House was working on “a fiscal stimulus package”. That little press release would’ve been better on Wednesday rather than Friday!
This fiscal faux pas could get a mention or two from the Democrats between now and the November poll. Earlier in the week, on the many media engagements I participated in, I suggested that Donald should show up with a budgetary bazooka to top the others from Australia, South Korea, Hong Kong. Other countries, such as Germany, will deliver next week. All the countries threatened by this virus will step up and fiscally stimulate, which will imbed growth in the pipeline for the second-half of 2020. But we have to see infection and death rates fall as fast as possible.
I hate the implications of containment policies – we’ve had to postpone our Investor Strategy Days over the next two weeks, where over 2,000 people were locked in to show up – but this is all a big step back for economic growth to surge forward after the worst is over.
The local disaster left the S&P/ASX 200 Index down 10.9% for the week to finish at 5539.3. The unusual eating habits in China and questionable Third World sanitary customs, combined with an interdependent world (we travel like there’s no tomorrow), cost our stock market nearly $204 billion!
The companies that had a good week were my favourite Xero up 6.94%, Cochlear 5.42%, Costa Group 5.39%, Fortescue 3.44% and Bega Cheese 2.24%. The AFR says the big losers were oOh!Media off 35.15%, Gold Road Resource 34.95%, Webjet 31.94%, Credit Corp Group 31.93% and Qantas 31.76%.
The banks had a shocker, with NAB down 16.32% to $18.41, ANZ off 15.1% to $18.80, Westpac 15.13% lower at $18.12 and CBA losing 10.24% to $66.36. For future buyers, their dividend yield, even with any possible cuts, will be unbelievable.
Next week becomes a virtual ping pong match between the scary numbers of the spread of the virus and its economic dislocation announcements/effects, such as no crowds at soccer matches versus the stimulus packages from the US and other world players.
I don’t expect to see a week as bad as this one, unless the Coronavirus shocks us to our socks with its spreading and world leaders have a shocker.
Before Woody Allen became rejectable as a weirdo, he made a useful observation about the nuclear threat of the 1960s, which resonates with recent market developments. This is what he satirically said: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”
What I liked
- The average new mortgage stands at a record $504,000, lifting 21.7% on the year – the fastest annual pace in 16 years of data.
- The CommSec luxury vehicle sales index has risen for the past eight months, matching the lift in national home prices.
- The US Federal Reserve offered $500 billion in a three-month repo operation on Thursday. It will offer an additional $500 billion in one-month repo and $500 billion in three-month repo loans on Friday.
- The Federal Government’s $17.6 billion package of measures that aim to support businesses and the most vulnerable consumers in the wake of the COVID-19 coronavirus pandemic.
- US mortgage applications soared by 55.4% in the past week.
- The Bank of England decision to cut the base rate by 50 basis points or half a per cent to 0.25%.
- Wednesday oil prices rebounded as much as 10%.
What I didn’t like
- Anything linked to the Coronavirus!
- The Westpac/Melbourne Institute survey of consumer sentiment index fell by 3.8% in March to 91.9, after rising by 2.3% in February. A reading below 100 points denotes pessimism.
- The NAB business confidence index fell from -1.0 points to -3.6 points in February (the long-term average is +5.8 points). And the business conditions index fell from +2.0 points to +0.4 points (the long-term average is +5.7 points). To date, 50% of companies responding to its latest NAB survey indicated no impact of the coronavirus.
- The breakdown of the OPEC+ Group oil production agreement, the oil price fell by more than 20%.
- The European Central Bank left rates unchanged but boosted its asset purchase program and introduced measures to support bank based transmission of monetary policy. The EU team are idiots!
- The market reaction to US President Donald Trump restricting air travel with Europe on Thursday.
- The World Health Organisation declared the COVID-19 coronavirus a global pandemic on Thursday.
Black swans are bloody black swans!
I wished I’d told you all to cash out last week, but I just could not see this week’s madness, which was summed up in my first paragraph. Paul Rickard and I were doing a masterclass at our Strategy Day events, which we planned six weeks ago, showing you how to insure against portfolio losses from a huge sell off. But we were beaten by the Coronavirus and dumb leaders worldwide.
In coming weeks I will look for stimulus packages and odd stuff like this: “Reuters reported that German logistics firm Deutsche Post jumped 6% after saying it had started to see volumes in China recover from the impact of the coronavirus outbreak, and announced a bigger than expected annual dividend.”
It’s post-virus positive economic stories like this that will give clues to bigger stock marker rebounds ahead.
Keep the faith. We will rebound.
The week in review:
- Around this time two years ago, I asked some respected market experts to give me one stock to hold for 10 years. Recently, I checked out how the stocks picked by my experts had performed [1].
- If there is a positive in this current market mayhem, it’s that mispricing opportunities abound. Here are some current opportunities in Australian shares and “risky” fixed interest from Paul Rickard [2].
- Charlie Aitken tried to challenge your thinking in his article this week [3], and asked you to consider why you might not have any exposure to global companies in global dollars.
- Tony Featherstone wrote that long-term investors need to capitalise on bouts of elevated market volatility, such as now [4].
- Once the realisation broke through that the coronavirus (COVID-19) outbreak was a big problem for the world, traders and investors would have started to think about stocks that might benefit. Here are 5 stocks that James Dunn has checked out [5].
- Upgrades outnumbered downgrades again in both the first [6] and second edition [7] of Buy, Hold, Sell – What the Brokers Say this week.
- CMC Markets’ Chief Market Strategist, Michael McCarthy, highlighted WiseTech Global (WTC) as the Hot Stock of the week [8].
- Paul Rickard answered questions about CBA’s dividend re-investment plan, the stocks to buy for the recovery and which bank to buy [9].
On our YouTube channel this week:
- Stock market disaster? Or buying opportunity? [10]
- How would the coronavirus hit house prices & 8 reasons not to buy off-the-plan [11]
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday March 16 – Overseas arrivals/departures (January)
Monday March 16 – Speech from Reserve Bank official
Tuesday March 17 – Residential prices (December)
Tuesday March 17 – Reserve Bank Board minutes
Tuesday March 17 – CBA Household spending intentions
Wednesday March 18 – Speech from Reserve Bank official
Thursday March 19 – Employment/unemployment (February)
Thursday March 19 – Population (December quarter)
Overseas
Monday March 16 – China investment/production/retail (Feb.)
Monday March 16 – US Empire State manufacturing (March)
Tuesday March 17 – US Retail sales (February)
Tuesday March 17 – US Industrial production (February)
Tuesday March 17 – US JOLTS job openings (January)
Tuesday March 17 – US NAHB Housing Market index
March 17-18 – US Federal Reserve interest rate decision
Wednesday March 18 – US Housing starts (February)
Thursday March 19 – US Philadelphia Fed manuf. index (March)
Thursday March 19 – US Conference Board Leading index (Feb.)
Friday March 20 – US Existing home sales (February)
Friday March 20 – China interest rates (March)
Food for thought:
“The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.” – Seth Klarman
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 shows how this has changed compared to the week before.
Chart of the week:
The risk of a US Recession within the next 12 months has risen to 53% according to modelling by Bloomberg Economics, the highest point since June 2009:
Top 5 most clicked:
- Stocks for the next 10 years: what the experts say [1] – Peter Switzer
- Opportunities in the market carnage [2] – Paul Rickard
- Buy, Hold, Sell – What the Brokers Say [6] – Rudi Filapek-Vandyck
- Is it time to buy? If so, what shares are bargains? [4] – Tony Featherstone
- 5 stocks that might benefit from COVID-19 [5] – James Dunn
Recent Switzer Reports:
Monday 09 March: Stocks for the next 10 years [12]
Thursday 12 March: The case for global equities [13]
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.