It’s a testing time for the stock market and it’s linked to weak economic data out of Europe, some unhelpful tariff references from President Trump and bond market moves that again make many think a recession is out there waiting to happen.
It look likes the market’s first negative reaction to the Fed’s ‘no more rate rises this year’ message might be more sensible than Thursday’s, when a rethink brought back buyers and bulls ruled. Overnight, the bears were growling and ahead of the close the US market looked poised for one of the worst days for 2019.
The big negative came from the bond market where the yield curve went negative and this is an old trusted sign that a recession is in the wings. The spread between the 3-month Treasury bill yield and the 10-year note rate turned negative for the first time since 2007. It has been flattening but on Friday it went negative so it’s a huge sell signal.
That said, as Michael Knox from Morgans explained on my Money Talks program on Monday night, the inverted yield curve usually says a recession can be expected within eight quarters, which in normal language is two years!
You might recall I told you that the Economists Intelligence Unit early last year tipped a US recession in 2020 but I suggested we could see that pushed out to 2021 depending on how people like Donald Trump and bodies such as the Fed and the European Central Bank, along with Beijing, respond.
Ironically, all this trade war sniping that has undermined global growth undoubtedly has not been useful. It has coincided with quicker than expected falls in real GDP growth in Europe, China and the USA. The free trade economists warned Donald about this and while other factors are at play, his treatment of his trade partners, meant to make them keen on his trade plays, has undermined global economic activity.
A key trigger for the bond market’s negativity was the HIS Markit readings out of Europe. Germany’s March manufacturing numbers were the worst in six years! France’s manufacturing and services were the weakest for the year while Eurozone manufacturing was at a six year low.
US bank shares copped it overnight, which won’t help local bank shares, so hold your breath for a bad day at the office for stocks on Monday.
One important number to understand is that 40% of the revenue for the companies in the S&P 500 index comes from overseas, so a weak overseas economic outlook has to spook bond market players, who are always trying to guess our economic future. They either buy or sell bonds and these actions then affect the yields on bonds. Overnight their collective actions are screaming “beware!”
The local stock market hasn’t been able to get mad and enthusiastic like the Yanks recently but it has been tending to the upside. I suspect the expectations of Donald Trump pulling off a trade deal has been offsetting the negatives from the election black clouds hanging over us at the moment.
The S&P/ASX 200 had a nice finish to be up 28 points on Friday but it only put on 20 points for the week to finish at 6195.2 after Wall Street did not know how to respond to the Fed after it told us that it doesn’t expect any interest rate rises this year.
The question for stock players is: “Can this market, after a big rise since December 24, go higher?” I think the trade deal becomes even more important in light of this recession talk.
One guy who thinks the trade deal will be HUGE is Jackson Wong, associate director at Huarong International Securities, who is tipping, wait for it, a 15% gain for stocks for the rest of the year, when a deal is inked!
“The rumour is (that by the) end of April, the deal would be 90 percent done. And, by end June, (the) deal would be signed.” Wong told CNBC. “Now the investors in China or around the world are expecting a deal to be done. They have been expecting this since the end of last year. So I think the market has been rallying from that point on.”
He believes a consolidation phase is probable before another leg up as the implications for the world economy are understood. The global slowdown is Trump trade war linked and so the undoing all of this could give a huge push to markets.
The wording and comments after a deal is done could be impactful on markets. “Both countries are standing on very fragile grounds and any sudden move on either side would break the trust on each other,” Wong said. “Investors are still cautious and nervous about that until they can decide a date that Donald Trump and Xi Jinping can meet. Otherwise, anything can be a wildcard.”
World growth needs a shot in the arm and a trade deal will be that but the President is still wrangling hard with China and that did not help stocks on Friday either. Donald wants clear evidence that the deal will help reduce the US-China trade deficit. The chart below from CNBC shows why:
Back home and after a good week for mining stocks locally with BHP up 3.1% for the week and Rio up 2.7%, this weak manufacturing data from Europe won’t help their share price next week.
One good sign on a night of bad ones is what’s happening to copper prices. They were at an eight-month high on Thursday hitting a high of $US6,555.50 a tonne. However, some of this is linked to a weaker outlook for the US, which has weakened the greenback and that pushes up commodity prices, which are priced in US dollars.
Where stocks go will hinge on economic revelations and, as we have the Fed onside with interest rates, it’s going to be up to Donald Trump and his trade deal to inject economic optimism into the bond market, which in turn will spread the good vibes to stocks.
It always gets back to Donald nowadays.
What I liked
- I only just liked our February jobs report because of the psychological value of seeing the unemployment rate fall from 5% to 4.9%, which brought the headline “A 10-year low!”
- Australia’s population expanded by 395,100 over the year to September 2018 to 25,101,917 people. Overall, Australia’s annual population growth rate rose from 1.59% to 1.6%. Queensland’s annual population growth rate is at 5-year highs of 1.74% and Tasmania’s is at 9-year highs of 1.15%.
- In trend terms, the Internet Vacancy Index (IVI) fell by 0.9% – the biggest fall in 3½ years – to 83.8 points in February but the index is 2.5% lower than a year ago, but it’s still 23.1% above the level recorded in February 2014!
- Economy-wide spending is growing at the fastest rate in nine months, according to the Commonwealth Bank Business Sales Indicator (BSI). The BSI, a measure of economy-wide spending, rose by 0.5% in February after a similar lift in January. Spending growth remains above the 0.4% long-term average monthly growth pace.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.2% – the biggest lift in four months – to 111.9 points. But consumer sentiment remains below both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990. (I’m not keen on weekly readings but I thought I’d share this with you given the bad confidence readings lately.)
- The leading index in the US rose by 0.2% in February (forecast +0.1%).
- The Philadelphia Federal Reserve index rose from -4.1 points to +13.7 points in March (forecast +4.5 points)
- The US Federal Reserve’s Open Market Committee (“FOMC”) kept the target range for the federal funds rate between 2.25-2.5%. And the FOMC is now forecasting no rate changes in 2019 (previously forecast two).
- The Wall Street Journal reported that the US-China trade talks were in the final stages with US officials due to fly to Beijing next week.
- Shares of Deutsche Bank (+4.2%) and Commerzbank (+7.2%) lifted on Tuesday after Germany’s largest lenders confirmed that they were in merger talks.
What I didn’t like
- The Board kept the cash rate unchanged at a record low 1.5% on March 5 and said “members agreed that there was not a strong case for a near-term adjustment in monetary policy. Rather, they assessed that it would be appropriate to hold the cash rate steady while new information became available that could help resolve the current tensions in the domestic economic data.”(I’d prefer a cut ASAP – why wait until the ceiling falls in when you know there is a leak in the roof?)
- UK House of Commons Speaker John Bercow dealt a blow to UK Prime Minister Theresa May’s Brexit strategy on Monday by banning her from bringing a “withdrawal deal” back to Parliament for a third time, unless it changes significantly.
- Talk about the yield curve turning negative this week where long-term bond rates are lower than short-term rates. This often points to a recession within eight quarters, which at least says we probably have a bit of time up our sleeves to make money out of stocks. (I wrote this before Wall Street started trading overnight but I was given a heads up about this from Morgan’s Michael Knox on Monday!)
Property punch up of the century
On Monday on the Your Money Channel and Channel 95 free to air, I will host a debate with doomsday merchant economist John Adams and the “the smartest guy in the room” – Christopher Joye from the AFR. It will be a battle and I hope Chris can find fault with John’s arguments for a huge fall in house prices especially in Sydney and Melbourne. Chris reckons he will “monster him” but John thinks he will wipe the floor with Chris. It should be a good encounter. I will be the objective ref because I want to know if my more optimistic view on the house price fall ahead is believable.
Upcoming events
Tickets are selling fast for the Switzer Investor Strategy Day, and as a valued subscriber, you can claim two complimentary tickets by clicking on the event you would like to attend below:
- Sydney: 30th April [1]
- Melbourne: 7th May [2]
- Brisbane: 8th May [3]
And this Wednesday morning, I’m hosting a live webinar with Paul Black, CEO of WCM Investment Management. WCM’s investment process is based on the belief that corporate culture is the biggest influence on a company’s ability to grow its competitive advantage or ‘moat’. This process has resulted in WCM’s Quality Global Growth strategy outperforming the MSCI World Index by an annualised 5.3% per annum over more than a decade, with annualised returns over the past 10 years of 14.5%. Click here [4] to register for this session.
The Week in Review:
- Let’s try to assess 2019 ahead [5], based on what we can see that could drive stock prices and what history says makes sense.
- Paul Rickard [6] put together an updated list of the best term cash and term deposit rates.
- Charlie Aitken [7] wrote that in equities, commodities, bonds and currencies, 2019 has all been about The Fed and Beijing reversing policy. Both have done 180° turns on their 2018 policies.
- With interest rates looking to drop even further, investors continue to look to the share market for yield. Here are 3 James Dunn believes are worth a serious look [8].
- Outdoor advertising stocks, such as Ooh Media, have attractive long-term prospects but is it dangerous to look too far ahead with megatrends or be seduced by technology’s potential? Read Tony Featherstone’s latest article [9].
- Julia Lee [10] identified the stocks that get her ‘thumbs up’ or ‘thumbs down’ given our current economic outlook.
- Sell-side analysts continued to issue more downgrades than upgrades for ASX-listed stocks in the first Buy, Hold, Sell – what the Brokers Say [11] this week, and in the second edition [12], downgrades again outweighed upgrades.
- Our Hot Stock [13] of the week from CMC Markets’ Michael McCarthy was Pinnacle Investment Group (PNI).
- And in Questions of the Week [14], we answered readers’ queries about the Caltex share buyback, private equity and whether AMP is a buy.
Top Stocks – how they fared:
What moved the market?
- The Fed indicated that there will be no more interest rate hikes in 2019.
- The EU will allow Brexit to be delayed until May 22 if Theresa May’s deal can be approved by MPs before April 12.
Calls of the week:
- Charlie Aitken [7] wrote: “I don’t think 2019 will be as simple as owning large cap US equities in US dollars.”
- James Dunn [8] identified FlexiGroup (FXL), Lycopodium (LYL) and Regional Express (REX) as three small caps with high-yield possibilities.
The Week Ahead:
Australia
Tuesday March 26 – Weekly consumer sentiment
Tuesday March 26 – Speech by Reserve Bank official
Wednesday March 27 – Speech by Reserve Bank official
Wednesday March 27 – Engineering construction (Dec quarter)
Thursday March 28 – Detailed employment (February)
Thursday March 28 – Job vacancies (February)
Thursday March 28 – Finance & wealth (December quarter)
Friday March 29 – Financial Aggregates (February)
Overseas
Tuesday March 26 – US Housing starts (February)
Tuesday March 26 – US Home prices (January)
Tuesday March 26 – US Consumer confidence (March)
Tuesday March 26 – US Richmond Federal Reserve index (March)
Wednesday March 27 – US Trade (January)
Thursday March 28 – Economic growth (December quarter)
Thursday March 28 – Pending home sales (February)
Friday March 29 – US Personal income/spending (February)
Friday March 29 – US New home sales (February)
Friday March 29 – US Chicago purchasing managers index (March)
Food for thought:
“The budget is not just a collection of numbers, but an expression of our values and aspirations.” – Jack Lew
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:
After the Fed announced interest rates will likely remain on hold for the remainder of 2019, CommSec published the following chart looking at both the US and Australian interest rate since 2010:
Source: Reserve Bank, CommSec
Top 5 most clicked:
- 6 reasons to stick with stocks in 2019 [5] – Peter Switzer
- 3 small cap high yielders to consider [8] – James Dunn
- The best term cash and term deposit rates [6] – Paul Rickard
- Julia’s big picture and how to play stocks [10] – Julia Lee
- Buy, Hold, Sell – What the Brokers Say [11] – Rudi Filapek-Vandyck
Recent Switzer Reports:
Monday 18 March: Sticking with stocks [15]
Thursday 21 March: All about The Fed & Beijing [16]
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.