Switzer on Saturday

Israel and Iran are the only threats to stocks

Founder and Publisher of the Switzer Report
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This week the negativity associated with the Middle East conflict has outweighed the positivity from the surprise stimulus from China, and the run of US economic data that has been implying that the Yanks could pull off an incredible soft landing, meaning no recession.

And the miles better-than-expected jobs report has made the outcome look like Goldilocks on steroids! History deems that after 11 interest rate rises, the US economy is very likely to go into recession. However, with September bringing a whopping 254,000 jobs and unemployment slipping down to 4.1% compared to what the survey of economists expected (which was a steady result of 4.2%), it looks like a welcome, unusual economic scenario.

Not surprisingly, the stock market lapped up the data drop. It offsets the concerns about what Israel might do with its response to Iran’s latest attacks, at least for the moment.

All four closely watched US stock market indexes ended in the green on Friday, after a tough week, with the small cap Russell 2000 the biggest beneficiary, up over 1%.

The tug-of-war between the Middle East’s drag on stock prices versus the boost that China has provided over the past week or so, was helped by these exceptional employment numbers. Right now, the biggest enduring concern is this question: will the US economy go into recession? Clearly, this result is an unexpected tailwind for stocks.

This is how Michelle Cluver, head of ETF model portfolios at Global X, saw the impact of the jobs report: “After a summer of weak labour data readings, this is a reassuring reading that the U.S. economy remains resilient, supported by a healthy labour market. We remain in an environment where good economic news is good news for the equity market as it increases the potential for a soft landing.”

Of course, if the Middle East war escalates, it will put a governor on how stocks react to this good news, but as AMP’s Shane Oliver reminded us: “The historical experience tells us the war around Israel won’t impact global markets in a big way unless global oil production is disrupted, but the risks on this front have increased with Iran (which accounts for 3% of global fuel supply) attacking Israel with more missiles. So far, oil prices have bounced but only by 8% or so from their lows a week ago, which is just a flick off the bottom which has taken prices back to where they were in August and a non-event in an historical context.”

The battle ahead is going to be data drops against Wall Street’s fear and loathing of what might come out of the Middle East. The US set to see the latest CPI next week, which should be another plus for share prices. Of course, if it shows that inflation is starting to pick up in conjunction with this stronger labour market, then interest rate cut expectations could turn on a dime, which wouldn’t help stocks. I’m not expecting this, but you can’t rule it out.

To the local story, and the hotting up of the Israel and Iran face-off saw the S&P/ASX 200 lose 55.2 points (or 0.67%) to end at 8150 points, which meant a 1.2% loss for the week.

The tailwinds of China have been offsetting the headwinds from the Middle East and clearly energy stocks have been the big recipients of market support, along with defensive plays.

Let’s look at the Stars & Strugglers for the week.

The Stars…

  1. Woodside at last showed some form, up 6.73% to $26.64.
  2. Light & Wonder rose 5.18% to $140.69 after slumping on a legal challenge earlier in the week.
  3. Karoon Energy put on 7.87% to $1.65 on Middle East threats to oil supplies.
  4. REA was up 8.57% after a failed acquisition in the UK.
  5. Fletcher Building went 9.16% higher after selling Tradelink.
  6. Other energy stocks did well out of the Middle East concerns and higher oil price.

The Strugglers…

  1. Nanosonics was off 4.95% to $3.55.
  2. Liontown Resources fell 9.76% to 74 cents with doubts still prevailing over lithium for the short term.
  3. Pilbara Resources lost 5.72% to $3.05 for the above reasons.
  4. Polynovo was down 6.9% to $2.43 after the latest results.

What I liked

  1. China’s policy stimulation.
  2. Local retail sales rose a stronger-than-expected 0.7% in August, which isn’t good for rate cuts but good for telling us the tax cuts could help save us from recession.
  3. Home prices continued to rise in September according to CoreLogic, but the pace was modest.
  4. Good news on the global inflation continued with another fall in Eurozone inflation. The ECB is on track for another rate cut this month (possibly 0.5%) and so is the Bank of England. This will help global growth in 2025 and is good for stocks.
  5. Australian budget surplus confirmed for 2023-24 at $15.8 billion (0.6% of GDP), up from $9.3 billion at budget time. I bet our looming deficit is less than currently predicted.
  6. The services ISM rose to a solid 54.9 with a rise in prices, which is a good anti-recession sign.

What I didn’t like

  1. War escalation in the Middle East — we miss genuine global leaders with clout!
  2. An 8% rise in oil prices.
  3. The local ABS’s Monthly Household Spending Indicator was flat in August with annual growth slowing to 1.7% year-on-year, pointing to ongoing weakness in real consumer spending. This is good for rate cuts but bad for recession concerns,
  4. The ISM manufacturing index remained weak at 47.2 with a fall in the prices component. We don’t want the US going into recession.
  5. Chinese business conditions PMIs remained weak in September with the Caixin PMIs catching down to the official PMIs. This is old news and explains why Beijing is stimulating.

Data watching to take a backseat

For three years I’ve been telling you that it would be the data drops that would determine how stocks will perform. But, for the short term, it’s all about Israel and Iran. An escalation in this war will take stocks prices down but I will be a buyer after a time because markets always overreact to the big scary event, then there’s a bounce back. That said, it can be personally scary waiting for the return of shareholder confidence and higher share prices. Timing the re-entry to the market isn’t easy but we’ll try to give good guidance.

 

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

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 

 

Quote of the Week

This a great summary from AMP’s Shane Oliver of what is likely to happen to stocks going forward: “Recession risks, the conflict in the Middle East, the US election along with still stretched valuations mean a high risk of another share market correction and continued bouts of volatility. However, the combination of global rate cuts, still okay global economic growth and Chinese stimulus are very positive for shares on a six-to-12-month horizon. While the RBA remains relatively hawkish the resumption of falling underlying inflation since May tells us that the start of rate cuts here is getting closer.”

 

Chart of the Week

The 5-day chart of the Hong Kong stock market index — the Hang Seng Index — which is up 14.09% for the past five days, shows the impact of Beijing’s decision to boost both monetary and importantly, fiscal stimuli.


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.