Once again, the US economy delivered, and it did so to the high side, with 225,000 jobs created in January when only around 158,000 were expected. Wages went up by a healthy 3.1% on an annual basis, and while unemployment edged up to 3.6%, it was because more Americans decided to re-join the workforce. This is a positive economic growth sign.
However, it didn’t help Wall Street, with all stock market indices down on that damn Coronavirus! And it wasn’t helped by the highly respected economist Ed Hyman, who is the Evercore ISI chairman, who told CNBC: “Our team has GDP growth at zero for the first quarter…China is really slowing and that’s worrying people for sure.”
That’s a guess but it does show you how bad this virus could get for economies worldwide, and China is our most important trading customer. That means watching the infections and deaths will be a tragic forward indicator, for not only the future for so many people’s health but the health of economies and stock markets.
The latest count overnight was from China’s National Health Commission, which confirmed 31,131 cases of the virus in the country, with 636 deaths.
Interestingly, Hyman is not so worried about China’s slowdown hurting the US economy to any significance. “Hyman believes the sell-off is a bit “overdone,” adding the U.S. economy actually accelerated during the SARS outbreak in 2003,” CNBC’s Yun Li revealed.
For obvious economic reasons, AMP Capital’s Shane Oliver has looked at the threat of the virus and this is what he has concluded:
- People can be infected with no symptoms for two weeks or so, making contagion easier, but the following is also significant.
- It remains mainly confined to China, with 99% of reported cases, and 66% in Hubei.
- The death rate is 2% and closer to swine flu than SARS, with 88% of those dying over 60 and 70% having prior conditions.
Source: PRC National Health Comm, WHO, Johns Hopkins CSSE, AMP Capital
“Taken together, this provides some confidence that the coronavirus outbreak will be contained within a month or so,” Shane concluded. “However, it will still have a severe impact on growth in the current quarter, as people stay at home in China and travel stops, even if for a few weeks. We are assuming a 2-3% hit to March quarter GDP growth in China but it could be worse than this. The Australian economy is likely to at least see a 0.2-0.3% of GDP hit from reduced tourist, education and resources earnings, which taken together with the bushfire impact of around 0.3% will likely see GDP contract this quarter.”
He’s tipping a June quarter economic rebound here but he did raise one concern that can never be ignored – and that’s the reliability of the numbers of infections and deaths coming out of China.
Those who pray have both a humanitarian and an economic reason to send their prayers in China’s direction. And if you want good news, World Health Organisation officials told us on Friday that the number of new Coronavirus cases slowed in China for a second day! It’s a positive development but hopefully this week the better news trend becomes more convincing.
Locally, the big market issue this week was undoubtedly the Coronavirus but our market still sneaked higher. The S&P/ASX 200 Index went up 5.4 points (or 0.1%) to 7022.6 this week, offsetting a big 1.3% slump on Monday.
China stimulus and reports that a cure for the virus was near both helped the stock market fight the negativity that was understandable, given the SARS experience. Another plus has been the US reporting season, where 70% of the 305 S&P 500 companies that have reported have exceeded estimates. Locally, the RBA Governor, Dr Phil Lowe gave the external economic story a nice thumbs up. “These (US-China trade agreement and Brexit issues) are encouraging developments and provide a reasonable basis to expect that this year will be better than last year.”
And his positive view extends to the local company. “Our central forecast is for the Australian economy to expand by 2¾ per cent over 2020 and 3 per cent the following year. These growth rates are a little above our current estimate of medium-term growth in Australia, so some inroad into spare capacity should be made.”
All this sounds great but be aware that if the virus scenario shocks on the scary side, stocks could fall 5-10%. This isn’t my expectation, given what I’ve read, but this is a very fluid situation.
Clearly, the Coronavirus has hurt materials companies as China has closed up shop. BHP Group lost 1.6% to be lower at $38.77, Rio shed 0.3% and Fortescue gave up 4.7%. Banks were mixed, with CBA down 0.5%, Westpac off 0.4% but ANZ added 1.1% and NAB put on 0.2%.
China and its virus hurt energy stocks, with Santos dropping 5.2%, Origin 5.6% and Woodside Petroleum slipped 2.5%.
Interestingly, the AFR says “Lithium miners shot higher this week after UK Prime Minister Boris Johnson vowed to phase out the sale of new diesel and petrol cars from Britain, including hybrids, by 2035.”
Pilbara Minerals rose 10.2%, Orocobre rose 9.9% and Galaxy Resources put on 7.3%. Meanwhile, Costa Group shot up 14.1%, and you can thank the rain for that.
What I liked
- The Reserve Bank has tweaked its near term economic (GDP) growth estimates due to bushfires and the Novel Coronavirus impacts. But medium-to-longer-term growth and inflation forecasts remain unchanged. The jobless rate has been revised down to 4.75% by late next year.
Hope they’re right about unemployment and growth! - The CBA/IHS Markit Services Purchasing Managers’ Index rose from 49.8 points to 50.6 points in January. Any reading below 50 indicates contraction in activity.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.5% to 108.5 points – the highest reading since early December. But sentiment remains below both the average of 114.1 points held since 2014 and the longer term average of 113.1 points since 1990.
- The measure of whether it was a ‘good time to buy a major household item’ rose by 2.7% to 27.8 points – the highest level since 20 October 2019.
- In seasonally-adjusted terms, private new detached home sales rose by 2% in December. But sales fell by 1.5% in the December quarter to be down 6.8% from a year ago.
- Council approvals to build new homes fell by 0.2% in December to 14,752 units but approvals are up by 2.7% from a year ago – the strongest annual growth rate in 19 months. In trend terms, overall approvals rose by 2.1% – the biggest increase in over two years.
- ANZ job advertisements rose by 3.8% in January – the biggest lift in 7 months. But ads were still down by 11.8% over the year to 149,544 in seasonally adjusted terms.
- The Melbourne Institute’s headline inflation gauge rose by 0.3% in January to be up 1.8% over the year. The Reserve Bank’s preferred underlying inflation measure – the trimmed mean gauge – rose by 0.4%, to be up 1.6% on the year.
- The ISM services index in the US rose from 54.9 to 55.5 in January (forecast 55). Business activity rose from 57 to 60.9 in the month.
- The ADP employment report showed that 291,000 jobs were created in January (forecast +156,000).
- The People’s Bank of China (PBOC) injected a total of 1.7 trillion yuan (US$242.74 billion) via reverse repos on Monday and Tuesday. The PBOC said on Tuesday that its huge liquidity injections through open market operations this week showed its determination to stabilise financial market expectations and restore market confidence.
- The IBD/TIPP Economic Optimism index in the US rose from 57.4 to 59.8 in February. Factory orders rose 1.8% in December (forecast +1.2%).
- Eurozone business conditions PMIs were revised up in Januaryand are continuing to recover from last year’s lows.
What I didn’t like
- In January, 71,731 new vehicles were sold, down by 12.5% (10,263 vehicles) over the year. In the year to January, sales of new vehicles totalled 1,052,604 units, down 8.2% on a year ago.
- The damn Corona virus!
Where are the dislikes?
Seriously, apart from this damn Coronavirus, I couldn’t easily find worrying dislikes over the course of the week – but there was a left-field shocker that didn’t get much attention on Friday in the US. As a final remark to its story on the good US jobs report, the BBC told us that “Revisions to prior reports also found that 514,000 fewer jobs were created between April 2018 and March 2019 than originally estimated. That marked the biggest statistical downgrade since 2009.” Whoops! And we laugh at the Chinese! I wasn’t sure if I should be worried that I couldn’t find many “dislikes”, and while I did take it as a good sign, that statistical mistake is unforgettably huge. And I guess one final dislike-related issue is that China not only has to improve its statistical honesty reputation, it also has to really lift its game on health!
Click here to view our latest webinar on reporting season with Rudi Filapek-Vandyck. [1]
The week in review:
- This isn’t a pathetic attempt by me to make money out of tragedy, but this coronavirus could be a buying opportunity [2]. But “when” you position yourself is going to be a lot harder to work out.
- The Aussie share market surged in January and despite concerns over the Coronavirus, the market added a very healthy 5%. Our model portfolios did even better [3].
- There is generally investment opportunity in bouts of above average volatility driven by what’s most likely a short-term event. If Mr Market gives him a chance to buy more of those “compounders” with a clear margin of safety, Charlie Aitken will act [4].
- Investors who prefer to source yield through direct share ownership should follow Tony Featherstone’s 4 rules and read his evaluation of 3 mid- or small-cap companies for you to consider [5].
- After its stellar 2019 and the early strength in January, is it crunch time for the Australian share market [6] as the December 2019 reporting season kicks into gear?
- There were 16 downgrades and 12 upgrades in the first Buy, Hold, Sell – What the Brokers Say [7] of the week, while upgrades over took downgrades in the second edition [8].
- CMC Markets’ Chief Market Strategist Michael McCarthy highlighted Santos as out Hot Stock this week [9].
- In Questions of the Week [10], Paul Rickard answered your questions about choosing which ETF to buy, investing in the NB Global Corporate Income Trust (NBI) and where to find a reporting season calendar.
On our YouTube channel this week:
- Coronavirus – is this a buying opportunity? [11] – Switzer TV: Investing
- Here’s what you need to know if you’re a first time property buyer [12] – Switzer TV: Property
Top Stocks – how they fared:
The Week Ahead:
Australia
Tuesday February 11 – NAB business survey (January)
Tuesday February 11 – Lending indicators (December)
Wednesday February 12 – Reserve Bank credit & debit cards
Wednesday February 12 – RBA official speech
Thursday February 13 – RBA Governor speech
Overseas
Monday February 10 – China Inflation (January)
Tuesday February 11 – US NFIB business optimism (January)
Tuesday February 11 – US JOLTS Job openings (December)
Wednesday February 12 – US Monthly budget (January)
February 11-12 – Testimony by Federal Reserve chair
Thursday February 13 – US Consumer price index (January)
Friday February 14 – US Retail sales (January)
Friday February 14 – US Industrial production (January)
Friday February 14 – US Consumer sentiment (February)
Food for thought:
“The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.” – Jesse Livermore
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:
CommSec published the following chart tracking the results of NAB’s business confidence and conditions surveys over the past two years, ahead of the release of the next NAB business survey on Tuesday:
Top 5 most clicked:
- Are there buying opportunities here? [2] – Peter Switzer
- Buy, Hold, Sell – What the Brokers Say [7] – Rudi Filapek-Vandyck
- 3 small- or mid-cap stocks with yield [5] – Tony Featherstone
- Look for the silver lining [4] – Charlie Aitken
- Is it crunch time for the Aussie share market? [6] – James Dunn
Recent Switzer Reports:
Monday 03 February: Is this a buying opportunity? [13]
Thursday 06 February: Buying opportunities [14]
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.