Switzer on Saturday

Stocks up as economies get closer to rate cuts

Founder and Publisher of the Switzer Report
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Positivity for the Dow Jones Industrial Average remained and put the index into an eight-day rising scenario, while the other major indexes i.e., the S&P 500 and the Nasdaq hovered around another up-day ahead of the close. This can only be linked to the current market view that interest rate cuts in the US are now very likely in 2024. Why?

As USnews.com put it: “The number of Americans applying for unemployment benefits jumped to its highest level in more than eight months last week, another indication that the red-hot U.S. labor market may be softening.”

When you add this to Federal Reserve boss Jerome Powell indicating the next move is probably down for interest rates and throw in a strong earnings season, it’s hard for market players to believe a big sell-off is imminent.

However, a rate cut’s timing is still going to restrain the market in coming weeks but the preliminary May reading for the University of Michigan’s consumer sentiment index might help make it happen sooner than many currently think.

The index of the vibe of consumers came in at 67.4, which was far below the estimate of the Dow Jones survey of 76 and marking its lowest reading in about six months! Of course, this has those who want to be negative about everything asking if the US is now heading for a recession!

So, now the US market has one group thinking the economy is too hot and needs rate rises, while the other goup is predicting a recession is likely. Combined, these opposing forecasts will keep a lid on optimism but the expectation that maybe a rate cut is closer than we thought last week will help stocks overall.

All up, the recent run of data keeps me believing my story that stocks will rise this year, so it was good to see that CFRA’s Sam Stovall raised his end-of-year target for the S&P 500 from 4940 to 5415, which is a 4% rise from current levels and implies a 13% plus rise for the year.  “This updated target marks one of the highest on the Street, behind only the 5,500 targets from John Stoltzfus at Oppenheimer,” CNBC’s Yun Li reported. “It is also 6% higher than the average projection of 5,105, according to the CNBC Pro Market Strategist Survey,which rounds up the targets from the top 14 Wall Street strategists.”

Given Chinese economic data has been heading in the positive direction that I’ve been hoping, it sets our market up to do the outperforming I’ve been tipping for our stock market this year. Since the pandemic low, the US market is up 126%, while our S&P/ASX 200 is up only a little over 60%! Remember this when experts argue our market is overbought or too expensive.

Inflation is falling, albeit slower than we want, interest rates will eventually fall and if China starts buying our iron ore and lithium, along with our wine and other exports, our economy will grow, and the stock market will play catch up with Wall Street.

To the local story and the S&P 500 racked up the third week in a row of rises, with the S&P/ASX 200 up 80.82 points for the week to finish at 5223.42, which was a 1.58% gain. Friday saw energy put in a good one, with Beach Energy rising 4% to $1.69, Karoon Energy rose 3.96% to $1.97, Santos put on 2.1% to $7.86, while Woodside added 1.9% to $28.63. These rises were linked to the Middle East conflict worsening over the week.

What I liked

  1. The RBA being sensible on interest rates on Tuesday.
  2. This from Shane Oliver: “We continue to see the RBA leaving rates on hold ahead of rate cuts starting late this year.”
  3. The Melbourne Institute’s Inflation Gauge points to a renewed slowing in CPI inflation in April.
  4. Newly lodged enterprise bargaining wage agreements continue to suggest the pace of wage rises under EBAs have peaked.
  5. In the UK, the money market is pricing in a 78% probability of a cut in June.
  6. On US earnings, 92% of S&P 500 companies have reported, with 79% beating expectations, against a norm of 76% and earnings growth expectations now at 10.2% year-on-year, up from 4.1% four weeks ago.
  7. Chinese exports and imports both rose more than expected in April.

What I didn’t like

  1. Real consumer spending in Australia was down 0.4% quarter-on-quarter in March. This was worse than expected, with real retail sales now down five of the last six quarters.

DeepFake SWITZER

On Friday, Ben Fordham, my colleague at 2GB, alerted me on air to an Artificial Intelligence or AI-created deepfake video that used one of my Switzer Investing TV episodes and changed the words. However, it captured my voice until the last words, which did turn American. The FAKE ME referred to a “stock club” that doesn’t exist! The only Switzer stock education information comes via this Switzer Report. If you see anything else purporting to be Peter Switzer on stocks, it will be a freakin’ fake, so please stay away – and even let me know so I can get it removed.

Artificial Intelligence (AI) has been great for stock prices, but it comes with some very worrying downsides.

 

Switzer This Week

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Switzer Daily

 

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

I have always linked my better year for stocks to a Chinese recovery and so this from AMP’s Shane Oliver was well-received: “Are Chinese shares in a new bull market? At their February low Chinese shares had fallen 45% from their 2021 high on the back of worries about the Chinese property market and economy and this left them very undervalued trading on a PE of around 10 times and under loved. Since then, they have rebounded 15%, with a recent pause giving way to a new recovery high. At this stage it’s too early to tell if it’s just a bounce or the start of a new bull market. But there are some positives supporting the case for more upside. While Chinese policy stimulus has been light on, the economy has been better than feared defying forecasts of a property driven collapse. And the strength in copper prices and the pickup in iron ore since its April low are providing some positive confirmation of possibly better conditions in China.”

Chart of the Week

Reuters headline: “US weekly jobless claims highest in more than eight months as labor market eases.” And this helped the belief that the US will cut rates this year and this was good for stocks.

 

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.