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Only the Fed can ruin this great market run

Posted By Peter Switzer On In Switzer on Saturday | Comments Disabled

Wall Street and stock market indexes were mixed but Friday’s trade couldn’t wipe out another positive week for stocks. And that’s despite bad reports from Tesla and Intel, where the predictions for what lay ahead for these important companies weren’t rosy.

As the news has been so good lately, I suspect only the Federal Reserve, which meets next week, could ruin the party!

Until Friday, both the S&P 500 and the Nasdaq had finished higher for the previous six trading days, and the former had closed at a record high for five sessions in a row. This was the best run of ‘up’ days in a row for the index since November 2021.

Clearly, overall company reporting is helping the Dow, the S&P 500 and the Nasdaq rise between 7% to 9% over the past six months, but since late October, the S&P 500 was up close to 19%, the Nasdaq rose 22%, while the Dow added 17.4%.

However, the good company earnings reports have been supported by very good economic news, especially in the US. Only this week we saw:

  1. The latest US economic growth rate at a bigger-than-expected 3.3%, while economists tipped 2%!
  2. The Fed’s favourite inflation reading — the core personal consumption expenditures price index (or PCE) gained a low 2%.
  3. Better still, headline inflation increased a small 1.7%.

Summing it up, senior investment strategist at Charles Schwab, Kevin Gordon, got it right with: “That was a really healthy mix of data — that’s pretty much as close to nirvana as you can get for the Fed in looking for non-inflationary growth”.

On Thursday, FactSet had looked at over 20% of companies in the S&P 500 and close to 74% had beaten experts’ expectations. It comes as the tech sector is now more than 30% of the Index, which hasn’t been seen since 2000, ahead of the tech wreck or dotcom bust! That said, 24 years on, tech companies are more fair dinkum businesses than back then.

Not surprisingly, with all these solid stock price gains, CNBC reports that the latest weekly survey by the American Association of Individual Investors is dropping. Individual investor optimism about the outlook for stock prices over the next six months dipped to 39.3% in the latest survey, while it was 40.4% last week and a 52-week high of 52.9% last December. The historical average is 37.5%.

Over the years I’ve noticed that this survey can be leg up for stock buying and CNBC said “…over the past year, investors were most bearish the week of November 1, shortly after the October stock market bottom, when 50.3% said they were negative on stocks. The historical average for bearish views is 31%”.

This reminds me of what Warren Buffett has often said, “to be greedy when others are fearful” and also that Bank of America research has shown that the first half rise of the stock market in a US presidential election year is often slower than the second half, so we could see some profit-taking ahead of another surge.

On the subject of economic matters, it’s going to be a big week of revelations for stock markets, with the US to see consumer confidence, employment cost numbers, purchasing manager indexes and the biggie i.e., the jobs report topping out the show-and-tell on Friday.

And these statistics will be split by the Fed meeting across January 30-31, making next week huge for share prices.

Meanwhile, locally, we’ll see the all-important CPI for the December quarter on Wednesday, which will tell us if it’s likely that the RBA is ‘done and dusted’ with its excessive rate rises.

Important purchasing manager data from China could be significant for our big miners and other export-exposed companies.

To the local story and the S&P/ASX 200 put on 1.8% for the four-day trading week to finish at 7555.40, which meant the market had knocked up five positive days in a row.

Wesfarmers continues to rise, going up 2.2% over the week to $58.45, while BHP put on 3.9% to $47.54. Rio was up 3.6% but Fortescue was the star with a 5.36% gain for the past five days, after maintaining “…its FY24 production guidance in its latest quarterly report after shipping near-record levels of iron ore in its first half of the financial year.” (AFR)

Here are the big winning and losing sectors:

The big bad shock story was Domino’s Pizza, which took a 31.1% hit after fessing up to trouble in its Asian stores. Happily, Resmed reported better than expected and rose 8.38% for the past five days and is now at $28.45 from a low of $21.44 in September last year, when Paul and I started asking if the market had gone too far with this company in dumping it. That’s been a 32% bounce-back since then!

What I liked

  1. The US economic data this week.
  2. The NAB Business surveyfor Decemberthat showed some improvement in business confidence, but the index is still negative and well below the long-run average. Business conditions dropped in December but are still positive. I’d add that low business confidence could restrain the RBA from further rate rises, especially if the December inflation number is on the low side.
  3. This on US reporting from AMP’s Diana Mousina: “US December quarter earningsare underway, with around 19% of companies having reported results. So far, around 80% of results have had a positive earnings surprise (above the long-run average of 76%) and earnings look to be on track for a 2% year on year fall.”
  4. The employment component of the NAB survey eased and cost indicators dropped further as well.
  5. Chinese shares rose by 1.1% after stimulus announcements from Beijing. Stocks have been down more than 40% since early 2021. This week, the People’s Bank of China announced a 50-basis point cut in the reserve requirement ratio (RRR) for all banks to 7% and a 25-basis point cut to the interest rate on its relending and rediscounting facilities. This is the first RRR cut since September.
  6. The Australian PMI rose in January, with manufacturing and services conditions rising (manufacturing is back to positive but services is still negative, which means that activity is contracting).  The price indices in the Australian PMI for January also trended down, which is another positive sign for inflation.

What I didn’t like

  1. Economists rightly thinking that the tax cut changes could be more inflationary because the Government is giving more money to those who’ll spend it. And while this is good for economic growth and helping less well-off Australians, wealthier people tend to save tax cuts and invest, which helps stock prices.
  2. The US leading indexfell by 0.1% in November and remains at levels that are typically associated with a recession, despite improving slightly in recent months. That said, the leading index isn’t an over-reliable indicator.

I repeat, it’s a big week ahead!

In a nutshell, if the Fed doesn’t spook stock markets by suggesting that rate cuts are a long way off and our CPI is still on the slide, it will be great for stocks. However, if we have the opposite outcomes, then expect a sell-off. The best news this week was strong US economic growth with falling inflation, which is the best description of a Goldilocks economy — not too hot, not too cold but just right!

 

Switzer This Week

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

15th – 19th January

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

Despite better than expected growth, the US inflation rate and Pipeline Indicator is in the 1% to less region. Growth without inflation is great news for investors.

Quote of the Week

“For some time now we have described global commodity markets as being in a ‘super-squeeze,’” its chief economist Paul Bloxham told CNBC. ““If it’s a supply constraint that’s driving high commodity prices, it’s a very different story for global growth,” said via Zoom. Higher prices as a result of a super squeeze are “not as positive.”

“We see the deeper ‘super-squeeze’ factors on the supply-side as still set to play a key role in keeping commodity prices elevated,” he said, outlining factors like political uncertainties, climate change and the lack of investments into the green energy transition.

(This suggests problems for inflation but Australian investors long mining stocks are likely to win.)

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.