It wasn’t a great week for local stocks but it was nice to hear and read that our stock market was approaching decade highs. And while we were in the red for three out of the five sessions last week (losing 28 points), it wasn’t a bad effort, given the re-emergence of US-China trade tensions and Kim Jong-un getting up to his old tricks, which could kill off his planned meeting in Singapore with President Trump.
But before looking at Donald-related, potentially, worrying news ahead, with the May 21 deadline for the US to finalise its tariffs on China and for the US Treasury to table proposed restrictions on China investing in the US, let me share with you some standout positive news that warmed the cockles of this stock market optimist’s heart.
First up, I like the current US economic growth outlook from the consensus of economists. The first quarter growth came in at 2.3%, which beat the 2% expectation but the expected second quarter growth has been tipped to be as high as 3.6%! This clearly keeps the positivity linked to US growth and the stock market firmly believable.
I also liked this one that few would have expected, with US retailers’ stock prices rising after a good profit report from Macy’s. Shares in Macy’s rose by 10.8%, after earnings beat expectations, which has to be another positive sign for the economy. Gee, I’d love to see that happen here for our retailers.
Meanwhile, this was a good headline that “US stocks fell by around 0.8% on Tuesday, pressured by fears of higher inflation and therefore higher interest rates”. These are signs of a healthy, normal economy, which need to happen to prove that the dark cloud of the GFC has finally been replaced by a blue-sky economy.
I also liked this development in the bond market. Shane Oliver of AMP noted that the US 2-year yields fell by 2 points to 2.573% but the US 10-year yields rose by 1 point to a 7-year high of 3.115%. This means the yield curve slopes up, with short rates lower than long rates. When the opposite happens, often it’s saying that a recession is looming.
However, the big uplifting revelation for the week came on my Sky News Business programme (Money Talks) on Monday, where CMC’s Michael McCarthy and Sharewealth Systems’ Gary Stone quite shocked me.
In a rare apologetic way, I reminded my two guests that before Donald got tweeting on trade, China and Iran, I’d speculated that we might see 7000 on the S&P/ASX 200 Index. So I asked them if economics and earnings could trump geopolitical stuff. Could we get to 6800?
But both said they think 7000 isn’t done and dusted for 2018! Sure, we have to see economics and earnings proceed as forecasted but both 24/7 market watchers believe we’re a chance. More importantly, neither are telling us that if you’re onboard with me and my 2018 optimism for stocks, then we’re all from La La Land.
That said, Donald has to be watched.
On the trade talks with China, Mr. Trump expressed doubt that any resolution will be achieved, although, as we’ve learnt about Donald over the past 18 months, this may be a bit of posturing to pressure China.
“We will see a negotiated solution ultimately, but it’s going to be a slow process, which won’t be over by the May 21 deadline,” Shane Oliver explained.
Back to the local story and despite the headwinds for local stocks (namely the banks and Telstra), my dividend growth fund, SWTZ, sneaked up from $2.54 to $2.57 this week, which is becoming a bit of a beacon for dividend stocks, given its raison d’être. However, Donald’s tweeting tantrums and the Royal Commission haven’t helped SWTZ, so I’m praying for some clean air, where economics and earnings in the US and here can be the main drivers of stock prices.
Not helping dividend players has been Telstra, with its share price diving below $3 this week. When Michael McCarthy said six months ago that he was interested in the telco again, when the share price got to $2.78, I thought he was being way too aggressive. But he’s nailed it. And with the market now asking: can the CEO Andy Penn last with this shocker of a story? it is starting to look like a buying opportunity. But I’m not there yet, though I will be testing this proposition in coming weeks.
I do believe the top 20 stocks, which have been beaten up for two years, are a good contrarian play for investors with time on their side. But when you move on this, it might differ on a stock-by-stock basis, unless you buy an ETF for these 20 companies.
Yep, in total, the outlook for stocks looks good but they do have to cope with the champion curve ball throwers from the White House, China, North Korea, and now Israel as well as Iran.
There has to be an easier way to make money!
What I liked
- The Westpac/Melbourne Institute monthly survey of consumer sentiment index fell by 0.6% to 101.8 points in May but the index remains above its long-term average of 101.5 points. A reading above 100 points denotes optimists outnumber pessimists and this was taken pre-Budget. However, the weekly ANZ/Roy Morgan consumer confidence rating rose by 1% to a 14-week high of 120.8. Confidence is up by 9.3% over the year and above the average of 113.6 since 2014.
- Economy-wide, spending rose again in April marking the 15th consecutive gain in trend terms. The Commonwealth Bank Business Sales Indicator (BSI) rose by 0.9% in trend terms in April. The BSI has now risen by 0.9-1% a month for the last five months. The annual trend growth in sales lifted from 7.7% to 8.4% – the fastest growth for 3½ years and above the decade-average pace of 3.3%.
- Employment rose by 22,600 in April after a job decline of 700 in March (previously reported as a rise of 4,900 jobs). Full-time jobs rose by 32,700, while part-time jobs fell by 10,000. Economists had tipped an increase in total jobs of around 20,000.
- Hours worked rose by 1.1% in April and were up by 5.4% over the year – the strongest annual gain in 18 years. Trend hours worked rose by 0.3% in April and are up 3.3% over the year – the strongest annual lift since October 2010.
- Unemployment rose from 5.5% to 5.6% but it was because the participation rate rose from 65.5% to 65.6%, which is seen as a positive sign for an economy.
- The wage price index rose by 0.5% in the March quarter, after a 0.5% rise in the December quarter. Annual wage growth remained steady at an 18-month high of 2.1%, which was just under expectations, but with bonuses, wages rose by 0.6% in the March quarter, to be up by 2.7% on a year ago – a 3-year high. Wages are not rising fast enough but the trend is more positive than negative.
- Tourist arrivals rose by 2.6% to a record-high of 771,600 in March. Departures rose by 4.1% in March to a record high of 908,100.
- In the US, the leading index rose by 0.4% in April as expected. The Philadelphia Federal Reserve index rose from 23.2 to 34.4 in May (forecast +21).
- US industrial production rose by 0.7% in April (forecast +0.6%). Capacity use rose from 77.6% to 78% (forecast 78.4%).
- The Empire State (New York) manufacturing index rose from +15.8 to +20.1 in May (forecast +15). The prices paid component jumped from +47.4 to +54.0.
- The NAHB housing market index in the US rose from +68 to +70 in May. Chain store sales rose at a 4.9% annual rate in the past week, up from a 4.2% gain.
- Production in China rose by 7% over the year (forecast 6.3%).
- Ahead of the Royal wedding, on Thursday the UK FTSE lifted by 0.7% to record highs.
What I didn’t like
- Total new lending commitments locally (housing, personal, commercial and lease finance) fell by 1.8% in March to $69.2 billion – the third fall in three months.
- US housing starts fell by 3.7% to a 1.352 million annual rate in April (forecast 1.35 million).
- In China, retail sales rose at a 9.4% annual rate in the year to April (forecast: +10%).
One last thing
I love this pic, which I’m using to sum up the market ‘hurricane’ called Donald Trump:
He’s the ‘gift’ that keeps on giving!
The Week in Review:
- This week I wrote about how only a recession could make me wrong on stocks! [1] When will the sucker show up!?
- Paul Rickard looked at a growth stock for the bottom drawer [2]. Find out which one it is.
- Small can be beautiful, and can also pay dividends so James Dunn listed 5 stocks under 50 cents [3].
- Chinese A-shares enter the big time [4] which is good news for anyone with exposure to the Middle Kingdom. Charlie Aitken discussed.
- Tony Featherstone shared 4 winners that cross online and offline worlds [5].
- In the first Buy, Hold, Sell – what the brokers say [6], there were upgrades for Domino’s Pizza and Baby Bunting.
- And in the second Buy, Hold, Sell – what the brokers say [7], Graincorp and Invocare were two of the lucky companies that got upgrades this week
- Platinum and Fortescue were featured in this week’s Hot Stocks [8].
- Woodside Petroleum is this week’s Professional’s Pick [9]. InvestSMART’s deputy head of research and Income Portfolio co-portfolio manager, Gaurav Sodhi, explains why this unloved stock needs a bit of loving.
- Plus, when do you get a dividend if a share goes ex dividend? Paul Rickard answers in Questions of the Week. [10]
Top Stocks – how they fared:
What moved the market?
- US data, including retail sales, supported the case for a strong US economy. US 10 year treasury bonds hit 3.10%
- The oil price hit $80 a barrel for the first time since November 2014. This was driven by renewed geopolitical concerns surrounding Iran.
- Telstra’s profit downgrade.
- Three of the four major banks traded ex-dividend.
Calls of the week:
- Meghan Markle and Prince Harry saying “I do” tonight!
- James Dunn named 5 stocks under 50 cents [3].
- Paul Rickard named LINK as a growth stock for the bottom drawer. [2]
The Week Ahead:
Australia
- Tuesday May 22 – Weekly consumer sentiment
- Wednesday May 23 – Speech by Reserve Bank Governor
- Wednesday May 23 – Construction work done (March quarter)
- Thursday May 24 – Speech from Reserve Bank Assistant Governor
- Thursday May 24 – Detailed job market data (April)
- Friday May 25 – Australian Industry 2016/17
Overseas
- Monday May 21 – US Chicago Federal Reserve index
- Tuesday May 22 – US Richmond Federal Reserve index
- Wednesday May 23 – Markit “flash” manufacturing & services
- Wednesday May 23 – US New home sales (April)
- Wednesday May 23 – US Federal Reserve minutes
- Thursday May 24 – US Existing home sales (April)
- Thursday May 24 – US House price index (March)
- Friday May 25 – US Durable goods orders (April)
Food for thought:
How can you add eight 8’s to get the number 1,000? (only use addition)
(Email subscriber@switzer.com.au [11] your answer)
Do you hear Yanny or Laurel? (Click this link [12])
(Hint: there is no correct answer for riddle two. Do you know why? Email subscriber@switzer.com.au [11])
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:
Royal Weddings rule Australian TV ratings!
The 2011 Royal Wedding accumulated the biggest Australian free-to-air TV Audience since 2008, with 4.09 million people watching across three channels, excluding live streams. Will everyone be watching Harry finally kiss his Princess?
Source: ABC
Top 5 most clicked:
- A growth stock for the bottom drawer [2] – Paul Rickard
- Only a recession could make me wrong on stocks! [1] – Peter Switzer
- 5 stocks under 50 cents [3] – James Dunn
- Buy, Hold, Sell – what the brokers say [6] – Rudi Filapek-Vandyck
- Hot stocks – Platinum and Fortescue [8] – Gaurav Sodhi
Recent Switzer Super Reports:
Thursday 17th May: T [13]he Middle Kingdom [13]
Monday 14th May: Recession rewind [14]
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.