Switzer on Saturday

Stocks and the world economy were ‘Coronavirussed’

Founder and Publisher of the Switzer Report
Print This Post A A A
[table “441” not found /]

European stock markets reacted positively to the combined firepower of monetary and fiscal policies as they lined up to offset the negative economic implications of the Coronavirus containment policies. The world economy is right in the middle of a huge fight to beat the virus and to offset the economic dislocation that comes with social distancing, social isolation and business shutdowns.

Not helping is the procrastination of US lawmakers to get a plan passed and into operation, which seems crazy, with the LA Times saying 18% of workers surveyed have lost their jobs or lost hours.

Meanwhile, experts surveyed by politico.com say the proposed and too-slow-coming $1 trillion stimulus package needs to be double that number! “My rule of thumb with a stimulus package is you don’t match the economic damage. That’s not enough,” said Jim Caron of Morgan Stanley Investment Management. “You need to do something on the order of twice that. So something like $1.5 trillion to $2 trillion could be the right number.”

He emphasized the importance of supporting small businesses when confronting these economy-killing threats. “Small and midsize businesses create 65 percent of employment. And consumption is 70 percent of the economy,” he said. “You’ve got to make sure those businesses are still there and people have jobs to go back to. And that means loans and other facilities that make money available to keep these businesses afloat. And that’s at least being discussed and that’s critical.”

Defenders of the package’s size point to the support of the Fed, so let’s hope they are right. Fortunately, locally, the Morrison Government is ramping up the support for SMEs and those who might lose their jobs for a few months. And the banks have been well-recruited to shore up the stimulus program.

Given this, it was no surprise to see our stock market head in the right direction on Friday but it’s still early days in the process of building a bottom out of which a strong stock price rebound is likely, when infection and death rates in Europe and the USA are detected.

I think the market collectively thinks it has built in a fair degree of insurance via the current sell off and now there’s a watching brief to see if more selling is needed or that the time to buy has arrived.

I’d love to say that time has arrived but I’ve been watching markets too long to allow my optimistic inclinations to get in the way of sensible guidance and investing.

New York Life Investments’ Lauren Goodwin nailed it on CNBC with the following: “Market volatility will persist until the government – fiscal or monetary – provides a backstop to stressed corporates and small & medium businesses,” she said. “Support of those functions is vital to ensuring the economic disruption of Covid-19, though severe, is temporary.”

The Yanks and how they contain the virus is a huge watch over the next couple of weeks and the Governor of New York, Andrew Cuomo, has told 100% of workers in non-essential businesses to work from home! You can see what negative economic effects that is bound to have, however, it’s a big step to reduce the impact/progress of the virus.

On the local front, the S&P/ASX 200 Index closed the week down 722.7 points, or 13.1% lower at 4816.6. Over four weeks, the market has lost $703.3 billion or 32%.

Over the week, CBA was off 9.6% to $60, Westpac 14% to $15.59, ANZ 16% to $15.78 and NAB 14.9% to $15.67. And Macquarie lost a huge 26.8% to $85.06.

CSL lost 13.9% to $270.15 but Woolworths put on 0.2% to $37.13. And what about Metcash? It’s up 30.5% to $3.17! Who would’ve tipped that before the Coronavirus had us wiping out supermarket shelves looking for toilet paper? The miners did surprisingly well, with Fortescue  up 5.9% to $10.52, BHP 1.8% to $27.19 and Rio 0.8% to $81.70.

Showing how short-term focused a stock market is, look at Transurban, which lost 20.9% to $10.30. Of course, millions of people working from home will affect this company for three months but once we head back towards normalcy, the motorways will again become the ‘money machines’ they’ve become in recent years.

Today or tomorrow we’ll hear more about our Government’s stimulus and support package. I only hope the Yanks can come out with at least an equally impressive set of measures to support their economy. Wall Street needs to see that kind of thing and fast! It’s why US stocks are down overnight, as well as another fall in the price of oil.

What I liked

  • Employment rose by 26,700 jobs in February – after increasing by 12,900 in January (previously estimated at 13,500). Full-time jobs rose by 6,700, with part-time jobs up by 20,000. Economists had tipped an increase in total jobs of around 8,000 and a jobless rate near 5.3%.
  • The unemployment rate fell from 5.29% in January to 5.1% in February, in seasonally-adjusted terms.
  • Early estimates show that retail trade rose by 0.4% in February.
  • The Bureau of Statistics reports that Australian home prices rose by 3.9% in the December quarter (the biggest lift in three years) to stand 2.5% higher over the year. The total value of residential dwellings in Australia was at a record high $7,212.6 billion in the December quarter.
  • The US Federal Reserve cut the federal funds rate to a range of zero-0.25%.
  • The European Central Bank pledged late on Wednesday to buy 750 billion euros ($820 billion) in sovereign debt through 2020.
  • The US Federal Reserve opened swap lines with central banks in nine new countries to ensure the world’s dollar-dependent financial system continued to function.
  • The Bank of England cut interest rates to 0.1%.
  • Industrial production in the US was up by 0.6% in February (forecast +0.4%).

What I didn’t like

  • Australia’s population expanded by 371,100 people over the year to September 2019 to 25,464,116. Overall, Australia’s annual population growth rate fell from 1.53% to 1.48% – the slowest pace in 3½ years.
  • Investors sold off on Wall Street waiting for details and approval on a touted $1.3 trillion stimulus package from Congress.
  • New claims for unemployment insurance in the US rose by 70,000 in the past week to a 30-month high of 281,000 (forecasts 220,000).
  • The Philadelphia Federal Reserve index fell from +36.7 points to an 8-year low of -12.7 points in March (forecast +10 points).
  • Anything to do with Coronavirus stats in Italy – that’s a tragedy that Italian politicians will inevitably be punished for. The question will be: why were Korea’s processes and health system better than the Italians?

I’m not alone

Over the past few weeks I’ve tried to present both sides of the Coronavirus story, while most of the media has concentrated on the negative. Jill Margo in the AFR on Friday flew the flag for good journalism with her story headlined: Why you need to look at all the stats, not just the scary ones.

She told us that: “As of Friday morning, over 104,000 tests had been performed in Australia and 708 cases had been confirmed. And there is comfort from Korea, where no citizen under the age of 29 has been lost to the virus, and only two under 50 have died.”

She also asked us to think about the challenge in a pretty sensible way. “Another way of calming panic may be to contextualise death,” she wrote. “Every death is a tragic loss and in the past month, seven Australians have died from this virus. This figure might cause less anxiety if people knew that in the same time period, more than 13,000 Australians died from other causes.”

Now that’s journalism I’m happy to pay for!

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Tuesday March 24 – Weekly consumer sentiment
Tuesday March 24 – CBA ‘flash’ purchasing managers index
Wednesday March 25 – Skilled vacancies (February)
Wednesday March 25 – Regional population (2018/19)
Wednesday March 25 – Engineering construction (Dec quarter)
Thursday March 26 – Finance & wealth (December quarter)
Thursday March 26 – Detailed job data (February)

Overseas
Monday March 23 – US National Activity Index (February)
Tuesday March 24 – US New home sales (February)
Tuesday March 24 – US Richmond Federal Reserve survey
Tuesday March 24 – US ‘flash’ purchasing managers index
Wednesday March 25 – US House price index (January)
Wednesday March 25 – US Durable goods orders (February)
Thursday March 26 – US Economic growth (Dec quarter)
Friday March 27 – US Personal income (February)
Friday March 27 – US Consumer sentiment (March)
Friday March 27 – China Industrial profits (February)

Food for thought:

“Life has immense analogy with stock market. It is volatile, but if you stick on long enough, it has the potential to reward you with handsome returns in the long run.” – Manoj Arora 

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:

This chart from CommSec shows that consumer confidence has been falling in line with interest rates over the past year:

Top 5 most clicked:

Recent Switzer Reports:

Monday 16 March: When will it be time to buy stocks?

Thursday 19 March: Don’t sell in panic!

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.