Ooh-ah! Stocks have oscillated in a 400-point range earlier in the Wall Street trading day, with bombshell Trump news hurting stocks. And then the odds of the tax cuts being passed shortened, and stock prices rebounded. Did anyone doubt Donald Trump’s importance to the market?
The Trump concerns heightened when ABC News reported that Mike Flynn would testify that he was directed to make contact with the Russians. Flynn was the former national security adviser to the President and has pleaded guilty to lying to the FBI about his post-election contacts with Russia’s ambassador to the US.
That news smashed stocks but then the Senate leader Mitch McConnell went public to say the Republicans have the votes to pass the tax legislation, and the rebound started. So it has been a tug-o-war on Wall Street, with Donald Trump anchoring both ends of the rope. For the sake of stocks, let’s hope there’s not enough rope left over to hang the President.
“It comes down to, did Trump obstruct justice in any way?” said Peter Boockvar, chief market analyst at The Lindsey Group. “It’s another potential political blindside. We’ve gotten a lot of those.”
Clearly, these political issues have a big impact on where stocks head but this US stock market rally is not all Trump, as a Reuters report two days ago showed. “The US economy grew faster than initially thought in the third quarter, notching its quickest pace in three years, buoyed by robust business spending on equipment and an accumulation of inventories,” the report said. “GDP expanded at a 3.3% annual rate… and that was the fastest pace since the third quarter of 2014 and a pickup from the second quarter’s 3.1 percent rate.”
Undoubtedly, a strong and improving US economy, plus the Trump factor, explains the record territory levels on Wall Street. Whatever your politics, if you want our market to trend higher, you’ve got to hope that Donald escapes this Russian roulette political problem. The ball is going around. Let’s hope the White House wins!
Leaving the US, and in case you missed it, this has been a great week for optimists, with most credible economists hitting Matt Barrie’s “beware of China and our house of cards economy” paper, which too many news outlets took seriously. If the CEO wants to talk about the online world, I’m all ears, but that piece was a lesson for budding economists on the need to be objective about your objectivity.
For the record, the S&P/ASX 200 index added 19.90 points (or 0.33%) to 5989.80 on Friday but the weekly rise was only 0.1%. Concerns about the US tax plan being stalled and that damn Royal Commission into banks was no help for our market. In contrast, OPEC’s apparent agreement helped energy stocks. And what about Beach Energy up 8.6%?!
When you think about it, stocks here and in the US have been driven by politics and whenever those critters get involved into listed companies, they make investing very challenging!
But it’s not all worrying news.
Down below, I list a lot of “What I liked” but let me give you a quick recap on why the past week has been comforting for an optimist on stocks and the local economy.
The Fed boss, Jerome Powell, was liked by Wall Street, OPEC cut a deal, the Trump tax cuts look more likely, the run of economic data – here and in the USA – remains uplifting and Macquarie Bank tipped stocks to rise 9% next year, and you can throw in dividends for say a 13.5% return! Why wouldn’t you be smiling? Well, I guess you could be shorting the market.
Let’s drill down into the week more closely.
What I liked
- The cut of the new Fed boss, Jerome Powell, and Wall Street agreed with me!
- Senator John McCain signing on for the Trump tax cuts and the Dow’s 331 point vote of approval.
- OPEC and its oil buddies agreeing on a deal that will prevent an oil price slump.
- US economic growth for the September quarter was 3.3% annualized.
- US consumer confidence hit a 17-year high.
- US new home sales rose by 6.2% in October to a 10-year high.
- Chinese manufacturing purchasing managers’ index data went up to 51.8 from 51.6, which surprised experts.
- Business investment readings in Oz – the most positive in 12 years! And expected business investment on the 4th estimate was the best in five years! The jump in expected investment from the first to the fourth estimate was up a huge 34.1%. That’s the biggest spike in 12 years.
- Local dwelling approvals in trend terms are up nine months in a row. Townhouse approvals are at a 20-year high.
- The EY Capital Confidence Barometer found executive confidence at a record high, with 63% up for M&A action over the next 12 months.
- The EY report says we’re in the top 5 as a destination for global investment.
What I didn’t like
- The gutless, pointless decision to hold a Royal Commission that will be a waste of time and our money. Banks need to be forced into behaving better but a Royal Commission won’t tell banking experts what they already know. This will short-term affect the rise in bank shares but it will create a buying opportunity.
- Kim Jong-un’s latest missile test that hurt Wall Street, until the missile landed in the sea. He’s a serial pest!
- ANZ’s weekly consumer confidence reading fell by 1.2% to 115 but it’s well above its average of 113.2.
One important observation
If the US, you can see a lot of economic data is in record high territory, which helps explain why Wall Street is in record high territory. Meanwhile, our economic data is currently registering record highs: 12-year highs, five-year highs etc. on so many important fronts, such as business investment, engineering, construction and many more. All up, this builds a rational case for agreeing with Macquarie Bank that stocks could easily rise by 9% plus dividends next year. I think the rise will be higher but I’d be happy with Macquarie’s call.
The Week in Review:
- With our debt-to-GDP ratio topping the OECD list, are the conditions in place for a crash? I looked at how we compare to the rest of the world [1] to put our debt fears into perspective!
- Following Coca-Cola’s share price falling to a 7-year low, Paul Rickard asked – Is there any fizz left in Coke? [2]
- It’s Christmas time and everyone is looking for presents – James Dunn offered four stocks [3] he’d like to see in his Christmas stocking next month.
- This week’s Hot Stocks [4] included a lithium producer, an insurance firm and the world’s biggest miner.
- In the first Buy, hold, sell – What the broker’s say [5], RCG Corporation received an upgrade on the back of Christmas sales optimism, while Mantra Group was in the ‘not-so-good’ books.
- And in the second Buy, hold, sell [6], Coca-Cola got an upgrade to ‘Buy’ while Treasury Wine Estates was downgraded.
- NAB spinoff CYBG plc was named by Charlie Aitken as his number one bank [7] holding globally.
- Tony Featherstone named four ASX-listed agribusiness stocks [8] as the pick of the bunch.
- Our Professional’s Pick [9] this week was packaging company Orora, which Michael Gable of Fairmont Equities said had “out-of-the box ideas.”
- Plus, our market guru Paul Rickard answered your financial queries, including what happens to ETF investments if there’s a crash [10]?
What moved the market
- Prime Minister Malcolm Turnbull announced a royal commission into banking misconduct, which will cost an estimated $75 million.
- There was growing optimism that Trump’s tax bill would be passed after US Senator John McCain threw his support behind it.
- Federal Reserve Chairman Nominee Jerome Powell indicated the Fed is likely to raise interest rates in December and gave an optimistic outlook on the markets.
- Kim Jong-un fired another missile that appeared capable of reaching the US, and Trump retaliated with another warning of sanctions.
Calls of the week
- The major banks back-flipped on their earlier rhetoric and called for a “properly constituted inquiry” into the banking sector.
- Donald Trump was widely called out for spreading fake news after he tweeted three anti-Muslim videos, an action UK Prime Minister Theresa May called ‘wrong.’
- Charlie Aitken named CYB as his number one bank [7] and Paul Rickard backed Coca-Cola [2] as a ‘buy.’
The Week Ahead
Australia
- Monday December 4 – Business Indicators (September quarter)
- Monday December 4 – Job advertisements (November)
- Tuesday December 5 – Reserve Bank Board meeting
- Tuesday December 5 – Speech by Reserve Bank Assistant Governor
- Tuesday December 5 – Retail trade (October)
- Tuesday December 5 – Government finance (September quarter)
- Tuesday December 5 – Balance of Payments (September quarter)
- Wednesday December 6 – Economic growth (September quarter)
- Thursday December 7 – International trade (October)
- Friday December 8 – Housing finance (October)
Overseas
- Monday December 4 – US Factory Orders (October)
- Monday December 4 – US ISM New York (August)
- Tuesday December 5 – China Caixin purchasing managers survey (Nov)
- Tuesday December 5 – US International trade (October)
- Tuesday December 5 – US ISM services (November)
- Wednesday December 6 – US ADP employment change (November)
- Thursday December 7 – US Challenger unemployment (November)
- Thursday December 7 – US Consumer credit (October)
- Friday December 8 – US Employment report (November)
- Friday December 8 – US Consumer confidence (December)
- Friday December 8 – China International trade (November)
- Saturday December 9 – China Consumer and producer prices (Nov)
Food for thought
Just because something doesn’t do what you planned it to do doesn’t mean it’s useless. – Thomas A. Edison
Last week’s TV Roundup
- I joined Paul Rickard for our December webinar [11] to discuss the outlook for 2018 plus three stocks to buy, and answer listener queries. Don’t miss it!
- To discuss his thoughts on the banking royal commission and what this means for the economy, AMP’s Shane Oliver [12] joined Super TV.
- Martin Lakos of Macquarie and Paul Rickard of the Switzer Report discussed what stocks are looking good [13] and where the market’s heading in 2018.
- Could China’s debt surge trigger a financial crisis in Australia? Sarah Hunter [14] of Oxford Economics offered her view.
- When business journalist Terry McCrann [15] writes, decision makers read. He shared his view on the economy for 2018 and the dividend imputation scheme.
- Business commentator Mike O’Hagan [16] talked about why there’s been an explosion of Australian SMEs outsourcing to the Philippines.
- Will there be a Christmas rally? FNArena’s Rudi Filapek-Vandyck [17] joined the show to discuss whether Santa will be kind to the market this year.
- NAB’s Gemma Dale [18] discussed the current euphoria for stocks as seen through new account openings.
- And Mary Manning [19] of Ellerston Capital explained why she believes Asia is the best place to invest next year.
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. This week, one of the biggest movers was Syrah Resources, with its short position decreasing by 0.76%.
Charts of the week
The Legatum Institute’s Prosperity Index of 149 countries showed Australia had fallen three places since last year on “prosperity” levels. The index measures economic quality, business, governance, education, health, safety, social capital and the natural environment. The graph below shows Australia’s index rank over the last decade.
Businesses are investing, and expect to spend even more in coming months. A new CommSec report found the upgrade in investment plans from the first to the fourth reading for the financial year is the strongest for an equivalent period going back 12 years.
Top 5 most clicked
- Charlie Aitken: CYB, my no.1 bank holding globally [7]
- James Dunn: 4 stocks for your Christmas stocking [3]
- Peter Switzer: Could housing debt hurt my stocks optimism? [1]
- Tony Featherstone: 4 stocks: “Dining boom” creates winners and losers [8]
- Staff Reporter: Hot stocks – Lithium and BHP [4]
Recent Switzer Super Reports
- Thursday 30 November: Banking and dining [20]
- Monday 27 November: Christmas stocks [21]
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.