Wednesday brought the spectacle of the Dow Jones index up by 545 points (or 2.1%), while the S&P500 index also spiked 2.1%. These were both posting the biggest post US midterm election gains since 1982, when the rise was close to 4%. The Nasdaq wacked on 2.6% but that’s no surprise, with tech stocks always showing the most volatility nowadays. (That was under Ronald Reagan, who was fighting a recession and the Democrats took the House of Reps.)
And with a couple of hours before its close, the S&P500 was down 1.2%, so we’re still in this game of ping pong, as equities react to every new challenge and opportunity. Recall before Wednesday the big four worries were the midterms, the China-US trade war, the Fed with its interest rate rises and oil prices.
After the midterm poll, healthcare stocks should do well, as the Democrats will stop President Trump’s planned repeal of the Affordable Care Act. They will also stop his next 10% cut in tax, which could have made fiscal policy too loose for the Fed, which might have forced quicker and bigger interest rate rises.
This is how the Democrat win might help stocks in 2019 – less gains from more risky tax cuts and a bigger US Budget Deficit but potentially less rate rises.
Because a stock market takes in the collective views of all market buyers and sellers, it’s complicated! The overnight complication for Wall Street was the fall in the price of oil, which now takes it into bear market territory, and history shows US stock markets don’t trend higher when the oil price is under pressure. This defies economics that says the lower cost of this crucial business input should be a plus but it can also be taken that the global economy could be heading for a slow down. So that gives us a new worry, though some will argue this oil price slump is an oversupply issue, not a demand one. This is the new worry on the wall of worry that stocks need to climb above, going forward.
Not helping was weaker economic data out of China, with car sales down 11.7% in October. That was the fourth bad month for the sector and shows how the Trump trade war is biting.
Lots of products in China are now dearer and it’s having a consumer sales effect and an economic impact, which stock markets won’t ignore.
Adding to the negatives was a hot producer prices number, which instantly made investors worry about a Fed that didn’t change rates on Thursday but is expected to raise in December. This solid business inflation adds fuel to the fire about how many rate rises the Yanks will see next year.
But before we see the latest take on market volatility, here’s a beautiful piece of history from Bank of America Merrill Lynch: since 1928 when there was a Republican president and the Congress was split like it is now, the S&P500 has had an average rise of 12%! I don’t take much out of the actual number but I do like the powerful direction trend and next year is the third year of the presidential cycle, which is another plus.
“Historically, returns for the third year of presidential terms have been lucrative for investors, with the S&P500 increasing by an average of 20.98%,” writes Ellen Chang of thestreet.com. “The average return on the S&P500 for the first year is 7.13%, while the second year is 6.39%, followed by a huge spike in the third year of 20.98% and a modest increase of 9.96% in the fourth year during the period from 1957 through 2012.”
Going local and the midterm election was good for local stocks, with our S&P/ASX 200 index up 1.2%, finishing at 5921.8. And while not a lot excited me, I did like the fact that financials, driven by a better view on banks, saw the sector put on 2.82%, while IT (which has become the new gauge for cyclical stocks) was 2.51%.
Of course, the banks can’t do much until we see what the Royal Commission recommends and then we’ll have to factor in the Government’s response, with a probable May election ahead. And then there’s Bill Shorten’s plans for banks, which you’d hardly tip will be good for bank share prices. This RC versus the banks battle makes it hard for our stock market to fight gravity.
Even though the banks have reported OK recently, they fight the tighter lending requirements on borrowers, thanks to the RC and the costs of remedying their past sins. And don’t rule out the challenges from non-bank lenders and the rise and rise of fin-tech rivals.
It’s complicated here too!
For anyone wondering why serial newsmaker, Syrah Resources, went 11.8% higher, the company announced that it had signed a binding sales agreement with Qingdao Taida-Huarun New Energy Technology. (AFR)
But shocker of the week was Lendlease, which dropped 17.3% to $14.25, after telling the market it will make a provision of $350 million after tax for the first half of the financial year. This is a complicated company nowadays and its engineering unit is said to be the troubled area for the business.
APA dropped 8.8% after the Treasurer said no to the takeover offer from CK Group out of Hong Kong, while Domino’s lost 12.1%, with analysts downgrading their views on the company. I’ve never held this stock because I thought it looked over-priced but it doesn’t seem to be able to deliver any positive stories of late, apart from promises of good stories!
The “what’s the deal with” question of the week has to be “what’s the deal with the higher Aussie dollar?” I know the forex guys would have an answer but a higher dollar isn’t a big help for stocks, as I think there are foreign buyers who want in to our stocks when the currency eventually bottoms in the 60 plus US cents range. But that might be a milestone for 2019. You need patience when it comes to stocks.
What I liked
- The Reserve Bank has lifted forecasts for economic growth to 3.5% for this year and next revised down forecasts for unemployment to 4.75% but left inflation forecasts largely unchanged. (Two out of three ain’t bad!)
- Over the year to October, exports rose by 15.6% (forecast: +11%) and imports increased by 21.4% (forecast: +14%). Imports have grown by the most since July. And annual export growth is the highest in eight months.
- The bullish tone of the RBA when it left rates on hold again on Cup day.
- The ANZ-Roy Morgan consumer confidence rating rose by 1.9% to 116.8 in the past week. The index is above both the average of 114.2 held since 2014 and the longer-term average of 113 held since 1990. (Not bad considering all the negative hype about house prices slumps!)
- ANZ job advertisements rose by 0.2% in October, after declining by 0.7% in September. Job ads were up 3.6% on a year ago.
- The AiGroup services sector gauge fell by 1.4 points to 51.1 in October. Despite the fall, services activity has now expanded for 20 consecutive months – the longest stretch since March 2008. The CBA/Markit services sector gauge eased from 52.2 to 51.7 in October.
- Donald being conciliatory with the Democrats after the election results and Wall Street liked it too.
- The Fed left the federal funds target rate at 2-2.25%, as expected. After noting in the previous statement the strength of household spending and investment, the Fed said: “Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.”
- The ISM services sector index in the US fell from 61.6 to 60.3 in October but it beat the forecast of 59.3. Any number over 50 means expansion. Both prices and employment indexes were lower but the Markit composite purchasing managers index was up from 53.9 to 54.9 in October (forecast 54.8).
- China’s international trade surplus rose by US$2.31 billion to US$34.01 billion (forecast: US$35 billion) in October. Donald has not quite trumped the Chinese yet.
What I didn’t like
- Chinese inflation is at an 8-month low of 2.5%, which could say something negative about demand.
- The number of loans (commitments) by home owners (owner-occupiers) fell by 1% in September, to be down 9.7% on the year. Excluding refinancing, new loans by owner occupiers eased by just 0.5% in September to three-year lows.
- The IBD/TIPP Economic Optimism index in the US fell from 57.8 to 56.4 (forecast 59.2) in November.
- Consumer inflation expectations over the next two years fell from 4.4% to 4.1% last week – the equal lowest level in over four months.
- In October, 90,718 new vehicles were sold, down by 5.3% over the year. In the 12 months to October, sales totaled 1,175,908 units, down 0.6% on a year ago. But SUV sales hit record highs of 498,850 units in the year to October. (This really is not all that bad news.)
- US consumer credit rose by US$9.26 billion in April but was short of the expected gain of US$13.75 billion.
The big takeout for the week
Back to the big picture and I liked the immediate response of Donald to the Democrat win in the House. In case you missed it, he said: “The Democrats will come to us with a plan for infrastructure, a plan for health care, a plan for whatever they’re looking at and we’ll negotiate.”
Every time Donald has played a more conventional President, the market has liked it. He knows he has to keep stocks rising, the US economy growing and jobs have to keep coming to be any chance in the next election in 2020, which is the year many economists think could bring a US recession!
The Week in Review:
- Despite the naysayers and a range of potential national and international threats, I think there is considerable cause for optimism [1] with stock markets in 2019.
- Paul Rickard provided an update [2] on the performance of model portfolios during the month of October.
- Adding physical gold to your portfolios in the next few months is a sound way to improve your portfolio insurance according to Tony Featherstone [3].
- In the first edition of Buy, Hold, Sell – what the brokers say [4] this week, stockbrokers overwhelmingly issued upgrades, while in the second edition [5], Orica received both an upgrade and a downgrade.
- Bryan Ashenden believes [6] a decrease in the number of self-managed super funds being set up should not deter investors who do their homework.
- At a time when equity markets have come under extreme pressure around the world, Michael Wayne suggests these quality businesses in four crucial sectors [7] should be on your radar.
- Tribeca Investment Partners portfolio manager Jun Bei Liu chose CSL as the Stock of the Week [8].
- Our Hot Stocks for the week [9] were The Reject Shop and Rio Tinto.
- And in Questions of the Week [10], we responded to reader queries about possible investment targets and the likely impact of a Bill Shorten-led Labor government on markets and portfolios.
Top Stocks – how they fared:
What moved the market?
- Westpac’s full year and CBA’s quarterly profit results boosted sentiment for bank stocks
- Wall Street reacted positively to the outcomes of the midterm elections in the United States.
- Stocks in China continue to underperform as the trade war with the United States continues, while Chinese President Xi Jinping continues to speak out in support of free trade and against protectionism.
Calls of the week:
- Six months out from the Melbourne Cup, winning jockey Kerrin McEvoy chose to ride on Cross Counter and not switch to Youngstar, delivering the first Cup for the Godolphin stable and McEvoy’s third win.
- RBA governor Phil Lowe said the economy is going to go up 3.5% and is even more bullish than me!
- Everyone that has already claimed their free tickets to the Switzer Income Conference later this month. Haven’t got yours? To claim your complimentary tickets, simply click here [11], choose the event you’d like to attend and enter the promotional code ‘SSR’ before checking out with your tickets.
The Week Ahead:
Australia
Monday November 12 – Credit & debit card lending (September)
Tuesday November 13 – Lending finance (September)
Tuesday November 13 – NAB Business survey (October)
Wednesday November 14 – Wages prices index (September quarter)
Wednesday November 14 – Consumer confidence (November)
Thursday November 15 – Employment/unemployment (October)
Thursday November 15 – Speech by Reserve Bank official
Friday November 16 – State accounts (2017/18)
Overseas
Tuesday November 13 – US NFIB Business Optimism (October)
Wednesday November 14 – US Consumer prices (October)
Wednesday November 14 – China activity data (October)
Thursday November 15 – US Retail sales (October)
Thursday November 15 – US Philadelphia Federal Reserve survey
Thursday November 15 – US Export and import prices (October)
Friday November 16 – US Industrial production (October)
Friday November 16 – US Capital flows (September)
The Switzer stumper:
What is the only country in the world that ends with a H?
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:
This chart from CNBC shows the yield on the 10-year Treasury note over the past 12 months:
Source: FactSet, CNBC
Top 5 most clicked:
- Bull market or a crash? The outlook for equity markets [1] – Peter Switzer
- The power of four – keep an eye on these quality companies [7] – Michael Wayne
- Buy, Hold, Sell — What the Brokers Say [4] – Rudi Filapek-Vandyck
- Buy, Hold, Sell — What the Brokers Say [5]
- Portfolios follow market lower in October [2] – Paul Rickard
Recent Switzer Reports:
Monday 5 November: Will it be a November to remember? [12]
Thursday 8 October: The power of four [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.