Switzer on Saturday

Santa came late this year but will his magic last in 2019?

Founder and Publisher of the Switzer Report
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Santa came late this year and had a lot to make up for with that big sell off on Christmas Eve, making the festive fare harder to enjoy for yours truly. At least there was the offsetting huge 1000-point plus rebound on Boxing Day! Maybe there is someone up there who answered my prayers. (As you can see, I do pray for unusual things.)

In case you missed it, the local S&P/ASX 200 Index ended the week up 186.7 points (or 3.4%) to hit the tape at 5654.3. One of the triggers for the US stock rebound that helped our market trend higher was news from Amazon that it had a record-breaking holiday season both in the USA and worldwide. The AFR reported that “…it was enough to send the S&P 500’s retail index rising by 7.4 per cent and Amazon’s own shares soaring by 9.5 per cent.”

That was one trigger but the reality was captured in a fact I gleaned from US business TV that the P/E for the US stock market had dropped to around a low 13 because of the over-selling since September. So the associated analysis of key market data suggested US corporate earnings would increase for the next quarter by only zero per cent!

In contrast, the consensus was saying the rise will be 9%! What we are witnessing nowadays is a man versus machine madness and mayhem market situation, which explains the wild swings both down and up. And it creates money-making opportunities for the courageous market player but it takes guts right now.

Computer trading, algorithms and artificial intelligence have changed markets and we now have to get used to it. Thankfully, fundamentals should prevail and I’m hoping over 2019 these prove to be better than was expected late last week, when the US stock market crashed into bear market territory.

I guess it’s timely to see how the US and local markets have actually fared since September when market optimism turned pessimistic.

Here’s the local sell off:

S&P/ASX 200

Source: au.finance.yahoo.com

With the top being 6339 for the S&P/ASX 200, we’re down 10.7%, which keeps us firmly in correction territory.

Meanwhile, the S&P 500 in the USA topped out around 2929. Before Friday’s play, it was 2488. That’s a 15% slide but it was down 17.5%, which was getting close to a bear market! And intraday, my figuring says it was 19.78%!

S&P 500

Source: au.finance.yahoo.com

Clearly we are in a precarious situation and the actions of Donald Trump, Jerome Powell, Xi Jinping, Teresa May and the mob in OPEC and the EU are geo-political risks that will make or break stock markets in the year ahead.

A big driver of the past few months of negative volatility has been the supposed economic slowdown, which I think is being magnified to the worst case scenario. If economic as well as corporate profit data and the actions of key players like Trump and Powell conspire to the positive, then we might get a pleasant surprise with stocks. However, as I’ve said before, there are a lot of curve balls out there for stock markets.

In March of this year, I told you the legendary Ray Dalio was long emerging markets with his Bridgewater & Associates investments. Then a few months later I told you Ray had reduced his exposure to emerging markets, indicating that geo-political challenges, that have economic implications, such as the trade war, were influencing him. (Increasingly, more market experts are starting to say that they’re interested in emerging market ETFs because they believe US interest rates are set to rise less than was expected, which should soften the greenback. This helps emerging economies.)

Overnight, the Dow was less volatile and two hours before the close was line ball and had only a 200-point range for trading, with better news helping buyer confidence. Getting near the closing bell, the buyers were outnumbering the sellers.

The recent rally in stocks was helped by:

  • the oversold market by Christmas Eve;
  • end-of-year tax loss selling in the US that had petered out;
  • pension funds that had done their end-of-year stock reallocations; and
  • short-covering by nervous short sellers, with that 1000-point plus surge of stocks, which showed on Boxing Day.

Right now I’m not sure the worst is behind us but I do like the current signs. I need to see a few more days of buyers outnumbering sellers and next week’s US job numbers will be important. That said, there’s plenty of history to say a big sell off of stocks can be good for the market in the year after but history shows there’s a fair bit of volatility in the early days before an uptrend for shares takes over.

And importantly, a near bear market doesn’t necessarily lead to a recession soon after. There have been 20% falls in stocks 13 times since 1945 and five times there was no recession within two years. The other eight times the US was in or on the verge of a recession and current economic analysis doesn’t suggest any such thing.

CNBC says that after such a big market fall, the average market fall in the following year is 8%, while the average rise is 14%. The worst bear market fall was 52% in 2007-08, while the “nicest” was 21% in 1956-57. This is analysis the White House has to contemplate.

What I liked

  • According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 8.1 cents to 130.5 cents a litre, which is good news for the consumer, who has more in their wallet for post-Christmas sales. A good retail January would help the economy and stocks for 2019.
  • CommSec’s Craig James’ take on what happened on Boxing Day in the USA: “Shares rebounded sharply on Wednesday, posting the largest daily percentage gains since March 2009. Retailers performed strongly. Shares of Wayfair (+11.7%), Kohl’s (+10.3%) and Dollar General (+7.2%) all rose. Data released by Mastercard SpendingPulse showed that US holiday sales rose by 5.1% to over US$850 billion, the strongest in six years. Amazon’s shares jumped 9.5% after the company said it had sold a record number of items during the holiday season. And shares of Marathon Oil and Hess were among the best performers within the energy sector, jumping 11.9% and 11% after the crude oil price rebounded. At the close of trade, the Dow Jones was up 1,086 points (or 5%), which was the largest daily point gain in history. The S&P500 index was up by 5%. The Nasdaq index rose by 361 points or 5.8%.” Music to my eyes!
  • The banks had a great week, with CBA up 5%, NAB up 4.9%, Westpac up 4.5% and ANZ rose 4.5%.
  • Macquarie maintained an “outperform” on Rio Tinto, with a $94 price target, which tells me that these guys aren’t expecting a stock market Armageddon.
  • Crude oil prices posted their strongest daily gain in more than two years. Both Brent crude and West Texas Intermediate rose about 8%, their largest one-day increase since 30 November 2016, when OPEC signed a landmark agreement to cut production.
  • The US stock market was down on Thursday on Trump trade war talk but the market loved the good news from bellwether companies such as IBM (up 2.2%), Procter & Gamble (+2.1%), DowDuPont (+2.1%) and 3M (+2.4%). Reality trumped speculation – love that kind of thing.

What I didn’t like

  • Friday and Monday watching US stocks dive close to bear market territory.
  • The Conference Board consumer confidence index in the USA fell by 8.3 points to 128.1 points (survey: 133.7 points) in December.
  • The pan-European STOXX 600 index fell by 1.7% to its lowest level since November 2016. Italian banks were 1.1% lower, coming under pressure after the top shareholder at Banca Carige put the troubled lender’s future into question by blocking a €400 million new share issue.
  • Until its post-Christmas rebound, the Dow was on pace for the worst December since, wait for it, 1931!

One HUGE like

CNBC reports that a Trump official contacted a prominent hedge fund manager at the depth of the stocks sell off to ask what the White House could do to get stocks to head up. The un-named billionaire investor told the Trump team member to tell the President to stop criticizing the Fed’s boss Jay Powell on Twitter, stop the turnover of key staff, crack a trade deal with China and stop the trade negotiator, Peter Navarro, from talking to the media with his inflammatory, anti-Chinese comments.

A smarter White House should be a plus for stocks in 2019 and Donald Trump has to know that a market crash causing a recession can’t be good for his re-election plans.

Happy New Year to you all. We’re overdue for one!

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.