Switzer on Saturday

No cigar for stocks optimists but soon we’ll be smoking

Founder and Publisher of the Switzer Report
Print This Post A A A

Just when it looked like stock market optimists would get that proverbial ‘cigar’ for being believers and buyers of out-of-favour growth stocks, along comes a hotter-than-expected inflation reading, which robbed Wall Street of the enthusiasm that had driven stocks up for most of the week. That said, this week’s action that saw both US and local stocks rack up a nice gain is what I call a “sneak preview” of what will happen when the market is certain that US interest rates are over.

This week showed a mere whiff of the celebratory cigar smoking and champagne popping that will come for stock players when inflation is seen as beaten and rate rises are over.  The time will be great for stock prices.

Friday’s stocks pullback was linked to the higher-than-expected CPI, which incidentally did fall month on month. In case you missed it, the index increased 0.4% on the month and 3.7% from a year ago. That compared with respective Dow Jones estimates of 0.3% and 3.6%.

Headline inflation increased 0.6% in August, so the 0.4% rise in September is progress. For those who wanted to tell us that the Fed would have trouble beating down inflation, the chart above shows those ‘experts’ were wrong.

Importantly, as CNBC reported: “Markets showed only a modest reaction to the report. Stocks edged higher at the open, while Treasury yields came off previous lows, with longer-duration notes little changed. The CPI increase meant worker wages fell in real terms.”

In addition, real average hourly earnings dropped 0.2% on the month, which the Fed would’ve liked. The CPI report was good without being great and it’s why stocks pulled back on Thursday and Friday.

Interestingly, the September quarter earnings kicked off this week and some big-name financial firms reported better-than-expected. Companies such as JPMorgan Chase, Blackrock, Wells Fargo and Citigroup were 1-2% gainers on the earnings news. This is another nice sign for optimistic stock players like yours truly.

I liked this from Adam Turnquist, chief technical strategist at LPL Financial: “Rates are still in the driver’s seat, and that’s really the rebound that we’re seeing since last Friday. There are early signs that we’re seeing technically here of a capitulation, but … we’re still fighting against an uptrend in longer-duration yields.” (CNBC)

I also like this from the rates-voting Fed President from Philadelphia, Patrick Harker: “Absent a stark turn in what I see in the data and hear from contacts … I believe that we are at the point where we can hold rates where they are.”

Provided data delivers, the end of rate rises in the US and here will be great for stocks.

I also liked this from AMP’s Shane Oliver: “Have we seen the bottom in shares? The rebound in share markets from their recent lows after falls of around 8% is impressive, given the wall of worries around Israel, US politics, recession risk, share market valuations, China, etc.”

And he added this: “Several things should help shares by year end: seasonality will start to become positive from mid-October; inflation is likely to continue to fall which should take pressure off central banks, allowing them to ease through next year; and any recession is likely to be mild. So, while near-term uncertainties remain high, our 12-month view on shares remains positive.”

Bottom line? Keep the faith. If you’re a risktaker who occasionally celebrates with cigars, go looking for Cubans! For me, I’ll be shopping for popping champagne!

To the local story and the S&P/ASX 200 ended the week down 40 points but for the week it was a winner, with a gain of 96.8 points (or 1.39%), which bears witness to my belief that when interest rate rises are over, stocks will spike.

Until the CPI in the US was revealed, bond yields were falling, and stocks were rising on Wall Street. Typically, we played follow the leader. Helping us was talk of Beijing finding more stimulus money to boost its faltering economy.

The table below shows how the well-known stocks performed this week, but in individual news, the board of Pact told shareholders to reject the buyout offer of the biggest shareholder, Raphael Geminder.

The AFR reports ResMed lost 2.6% after RBC brokers downgraded the stock to perform from outperform. It’s still positive but not as positive. Bega Cheese put on 2.9% after Bell Potter upgraded it to a buy. That’s long overdue. Perpetual rose 2.4% after it reported no notable exodus of funds over the September quarter.

Meanwhile, Harvey Norman went ex-dividend as of yesterday so was down 3.9%, and Fletcher Building was in a trading halt after facing accusations of using faulty plumbing parts.

What I liked

  1. Talk of more stimulus for the Chinese economy. Reports suggest Beijing is thinking about expanding its budget deficit by issuing 1 trillion yuan (or $A214 billion) for infrastructure spending.
  2. The Fed’s team of officials was less committed to talking about more rate rises needed, with the bond market seen as doing the work of slowing down the US economy via rising yields.
  3. The AMP US Pipeline Inflation Indicator has ticked down again and continues to point to lower inflation.
  4. Bond experts say the US money market has close to a zero probability of a November rate hike priced in, which should be good for stocks.
  5. The IMF puts global growth at 3% this year and 2.9% next.
  6. AMP’s Shane Oliver still thinks rate rises here are over.
  7. The September NAB survey showed business confidence remains at average levels and business conditions fell but remain OK. This is consistent with a slowing economy but not one heading for recession.
  8. The NAB survey showed a resumption of easing inflationary pressures after a mid-year spike, with a sharp slowing in reported increases for labour and purchase costs and final product prices.

What I didn’t like

  1. The Israel invasion and what ensued.
  2. This from Reuters this morning: “Oil surges 5% after Israel makes first ground raids into Gaza”.
  3. US inflation surprised on the upside in September, thanks mainly to higher fuel and shelter prices.
  4. Westpac consumer confidence is at recessionary levels.
  5. US consumer sentiment slumped in October, while inflation expectations spiked, according to the University of Michigan’s closely watched survey.

 

For those worried about Israel, oil and stocks…

Here’s some more Shane Oliver analysis: “The Gulf Wars in 1991 and 2003 briefly impacted oil prices because key oil producers were involved. And this is not a re-run of the 1973 Arab/Israeli war that saw Arab countries against Israel and OPEC boycott oil supplies to the US, which caused a fourfold increase in world oil prices and contributed to severe recession.

“Now, Arab countries are on the sidelines, with many having better relations with Israel. In fact, the timing of Hamas actions looks motivated to prevent progress towards a Saudi/Israeli security pact, which could have harmed them and Iran. So. the main risk would be if Iran, which backs Hamas and Hezbollah in Lebanon, is drawn into the conflict (possibly by Israeli retaliation against it), which could threaten its oil production (2.5% of global consumption), the flow of oil through the Strait of Hormuz (through which 20% of world oil consumption flows) or even Saudi production (as Iran did in 2019).”

I hope Shane’s right.

 

The Week in Review

Switzer TV

Switzer Report

Switzer Daily

The Week Ahead

Top Stocks — how they fared.

 

Chart of the Week

The spiking of bond yields explains why stocks have had a rough September.

AMP’s Shane Oliver said: “The good news is that the NAB survey showed a resumption of easing inflationary pressures after a mid-year spike, with a sharp slowing in reported increases for labour and purchase costs and final product prices.”

Revelation of the Week

Shane Oliver on market and economic similarities to 1987 when the stock market crashed:

  • The rise in bond yields has left shares offering a low risk premium over bonds leaving them at risk of more weakness.
  • The conflict in Israel has added to the risk, although the threat should be minimal if Iran is not drawn in avoiding a severe impact on oil supplies.
  • There are parallels with the run up in bond yields prior to the 1987 crash but relative valuations are less threatening now than back then.
  • Still falling inflation should take pressure off central banks next year, which should in turn be positive for shares.

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

 

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.