Ahead of the close and the Dow and the Nasdaq were in line for nine weeks of gains, while the local stock market registered a very positive week, finishing at a four month high! In case you weren’t counting (like I have to in confirming I haven’t given you a bum street), the S&P/ASX 200 Index climbed 101.2 points, or 1.7%, to finish at 6167.3.
Helping our market has been a better-than-expected reporting season, rate cut talk, higher commodity prices, the strong leadership from Wall Street (with trade talk progress a key driver) and a lower Aussie dollar.
And positivity about trade negotiations continue to keep stocks ticking higher. But make no bones about it, this biggest push on stocks has come from the Fed’s promise for “patience” on interest rate rises. By the way, it doesn’t mean they won’t raise rates this year but the message is pretty well clear that the economy will have to be doing better than is currently expected before the central bank moves to hike again.
Of course, the gains have some commentators pondering whether the market is overbought, which is a fair question to ask. “I really wish I could pick a sector that had defensive qualities right now, but everything has gone up so dramatically that when the pullback comes, it will probably be widespread,” said Thomas Thornton, founder and president of Hedge Fund Telemetry in the US. (CNBC)
Talk of a Donald Trump-Xi Jinping summit in the US in March has helped sentiment, with some speculating that this could be positive for not only US growth but China’s growth and, ultimately, global growth. Combined with the EU, which benefits from a stronger China, the world’s three largest economies combined produced $62.4 trillion and that’s 49% of the world’s total economy!
With 40% of S&P 500 companies’ revenue coming from overseas nowadays, the US President needs an improving world economy to ensure he can hold off a US recession and stock market crash before his next election in November 2020.
Supporting this possibly positive scenario was the Fed President of Cleveland, Loretta Mester, who this week said she didn’t see a US recession in 2019 or 2020! And while the quickness of the stock market rebound makes you think a sell off eventually makes sense, the facts are the drivers that took stocks down in the December quarter have driven the market up because worst case scenarios on US interest rates and on a trade war look to have been turned into best case scenarios.
With question marks hanging over everything, the one big watch will be the strength of the US and then the global economy. That’s my big watch now, with the key numbers rather inconclusive. All economies are going to be growing slower than expected but the extent of the slowing will be vital.
There’s also the chance that with positivity linked to the trade talks, it could end up being a ‘buy the rumour, sell the fact’ scenario but it should not lead to anything like we saw in the December quarter, where the S&P 500 nearly lost 20%!
Back to the local story, and it was good to see Labor’s Bill Shorten coming up with a proposal for mortgage brokers that was better than the Royal Commission recommendation. In reality, no changes were necessary, apart from a good punishment process for brokers behaving badly, which should be the case for all financial industry players. AFG, which is a broker group, saw their shares rise 29.5% this week, which shows what Labor’s policies and decisions can do to stocks.
Coles copped it, losing 8.5% after a net profit dropped 29% but Paul Rickard, after being anti the stock on floating, now thinks it’s in the “buy zone”, though he doesn’t think it will be a rip roaring performer going forward.
And I have to say I was glad to see Webjet’s 37% gain this week, as I’ve interviewed its MD, John Gusic numerous times. John’s always promised growth for the company and he has delivered.
Meanwhile, Altium wacked on 28% for the week, after telling the market its printed circuit board was kicking butt in China! Oh, my words not the CEOs. Revenue is set to tip $200 million next year and the likes of Geoff Wilson from WAM still like the stock as late as 7.35 pm last night when he emailed me the stock he likes going forward following reporting. (He has another that I’ll share with you in the Report on Monday.)
Disappointment of the week is the China-coal standoff. Happily, it didn’t derail the stock market’s improvement but some kind of payback was always on the cards, given our and the world’s hate session for Huawei. The ban on Aussie coal at the Dalian port only affects 2% of our coal exports to China but you have to ask: Where could this end?
With the economy coping with a shrinking housing sector and falling prices in Sydney and Melbourne, we don’t need a trade problem with China. This little challenge for the Morrison Government ahead of the May election looks well-timed by our trading buddies!
Finally, here’s AMP Capital’s Shane Oliver’s wrap of reporting season so far:
- 75% of companies have now reported.
- 56% of companies have seen their share price outperform on the day of reporting (which is above a longer term norm of 54%).
- But against this, only 40% have surprised analyst expectations on the upside, which is below the long run average of 44%.
- 34% have surprised on the downside, which is above the long run average of 25%.
- The proportion of companies seeing profits up from a year ago has fallen and only 59% have raised their dividends, which is a sign of reduced confidence in the outlook – six months ago, it was running at 77%!
All up, considering our headwinds of the Royal Commission, a slowing China, a troubled housing sector, trade war concerns, the loss of a PM and a looming election with Labor promising big changes, this reporting season turned out better than I expected. And provided Wall Street doesn’t go madly higher into May and then sell off dramatically, we could get a post-election bounce for stocks here down under. But a lot could go wrong before then.
What I liked
- This from the RBA boss, Dr. Phil Lowe: “This adjustment in the housing market is not expected to derail the economy.”
- Employment rose by 39,100 in January, after a revised 16,900 increase in jobs in December (previously reported as a 21,600 increase in jobs). Full-time jobs rose by 65,400 but part-time jobs fell by 26,300. Economists had tipped an increase in total jobs of around 15,000.
- The unemployment rate held steady at a 7½-year low of 5% in seasonally adjusted terms. In trend terms, the jobless rate remained at a 7½-year low of 5.1%.
- Including bonuses (hourly rates of pay), wages rose by 0.7% in the December quarter to be up by 2.8% on a year ago – the strongest growth rate in four years and the equal highest growth rate since December 2012.
- In trend terms, the Internet Vacancy Index rose by 1.3% to 6½-year highs of 88.2 points in January. The index is 3.3% higher than a year ago and 30.7% above its October 2013 low.
- Shares in WalMart rose 2.2% after holiday-quarter comparable sales beat estimates. The sales data from WalMart also served to lift shares in Amazon by 1.2%, as well as Target and Costco
- The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, continued to lift after the soft growth in September/October last year, rising by 0.6% in trend terms in January. Spending grew across the majority of industry sectors and across all states and territories in January.
- Tourist arrivals rose by 0.6% in December, with Aussie tourist departures up by 1.2%. Over the year to December, arrivals were up 4.9% and departures increased by 8%, in seasonally adjusted terms. But arrivals were up by 3.3% in trend terms – the slowest annual growth rate in 6½ years. However, the numbers are still big, just growing slower and there was still a record 180,500 Canadian tourists travelling to Australia over the year to December, up by 7.8%. Holidaymakers from China, India and Indonesia also hit record highs.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 1% to 115.2 points, above the average of 114.3 points held since 2014 and higher than the longer term average of 113.1 points since 1990. Consumers’ views on their family finances over the next year rose by 3.6% to 130.2 points – the second highest reading since mid-June 2018.
- The NAHB housing market index in the US rose from +58 to +62 in February (forecast +59).
- US chain store sales in the past week were up by 5.4% on a year ago, up from a 4.6% annual gain in the prior week.
What I didn’t like
- In the 12 months to January 2019, the Budget deficit stood at $3,825 million (0.2% of GDP), up from a 9½ year low of a $1,569 million deficit in the year to December. (I hope this isn’t telling us the economy is slowing faster than I think.)
- The Philadelphia Federal Reserve index eased from +18 to -4.1 in February. The leading index fell by 0.1% in January (forecast +0.1%). I hope this is a one-off bad number. The cold months in the US can produce some curve ball stats.
- The ‘flash’ euro zone manufacturing index fell from 50.5 to 49.2 in February – the lowest reading since May 2013.
- Minutes from the last Federal Reserve meeting revealed that policy makers said softness in core and total inflation was a reason for a patient approach to policy. Policymakers noted a tightening of financial conditions and uncertainties on the global economy.
- Talk that the EU will slap tariffs on heavy machinery, such as the stuff Caterpillar makes, if the US hits European cars with tariffs!
Another Switzer joins the clan
Many of you might recall my son Marty standing in for me on my TV show over the last few years when I took a break. Marty’s now CEO of listed fund manager Contango Asset Management. He’s gone long the growth sector called women, with his wife Jess adding another daughter to our clan last Thursday evening. Look out for Winnie Switzer in the future!
The Week in Review:
- I asked whether you are ‘fund manager of the year’ for your SMSF [1].
- Here’s why [2] Paul Rickard likes NAB’s new hybrid issue.
- Boeing is “one of the greatest businesses in the world” according to Charlie Aitken [3].
- James Dunn [4] listed 5 offshore earners that are among the best-positioned for when the A$ drops.
- Tony Featherstone [5] highlighted his favourite childcare stock and REIT: G8 Education and ARENA REIT.
- Whitehaven Coal was our Hot Stock [6] for the week from CMC Markets’ Chief Market Strategist, Michael McCarthy.
- Downgrades continued to outnumber upgrades in the first Buy, Hold, Sell – what the brokers say [7] of this week, and this continued in the second edition [8].
- And in Questions of the Week [9], we answered readers’ queries about dead cat bounces, directors selling shares, CYB (Clydesdale Bank) and tech disrupters.
Top Stocks – how they fared:
What moved the market?
- Reporting season has continued to deliver better than expected results.
- Trade discussions between the US and China were held in Washington this week with officials working on memorandums of understanding.
Calls of the week:
- Charlie Aitken [3] said that Boeing is “wonderfully positioned”, adding: “If it ain’t Boeing, I’m not going”.
- Paul Rickard [2] wrote positively on NAB Capital Notes 3 and said he will be investing.
The Week Ahead:
Australia
Wednesday February 27 – Construction work done (December quarter)
Thursday February 28 – Business investment (December quarter)
Thursday February 28 – Private sector credit (December)
Friday March 1 – CoreLogic home prices (February)
Friday March 1 – AiGroup & CBA purchasing managers indexes
Overseas
Tuesday February 26 – Testimony by US Federal Reserve chair
Tuesday February 26 – US Housing starts (December)
Tuesday February 26 – US S&P/Case Shiller home prices (December)
Tuesday February 26 – US Consumer confidence (February)
Thursday February 28 – US Economic growth (December quarter)
Thursday February 28 – China “official” manufacturing surveys (February)
Friday March 1 – China Caixin manufacturing (February)
Friday March 1 – US Personal income/spending (December)
Friday March 1 – US ISM manufacturing (February)
Food for thought:
“Investors have to ask themselves two questions. How much can we grow our investments? And, can we afford our mistakes?” – Mohamed El-Erian
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:
40% of companies have beaten analyst expectations so far this reporting season, while 34% have been lower than expected:
Source: AMP Capital
Top 5 most clicked:
- Are you ‘fund manager of the year’ for your SMSF? [1] – Peter Switzer
- 5 of our best-positioned offshore earners when our $ drops [4] – James Dunn
- Why I like NAB’s new hybrid issue [2] – Paul Rickard
- Buy, Hold, Sell – What the Brokers Say (Monday) [7] – Rudi Filapek-Vandyck
- Buy, Hold, Sell – What the Brokers Say (Thursday) [8] – Rudi Filapek-Vandyck
Recent Switzer Reports:
Monday 18 February: Are you fund manager of the year? [10]
Thursday 21 February: Boeing, childcare + bouncing cats! [11]
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.