Switzer on Saturday

Stocks were stumbling but what just happened?

Founder and Publisher of the Switzer Report
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It was a loser week locally.  In fact, it has been a loser month. But we are up over 7% for the half year and 18.5% for the year, so let’s keep this sell-off in perspective. We have a US election only five US days away and the experts think the result could swing the S&P 500 around 2% depending on the result.

But this is all short-term stuff, as were the triggers for our Friday sell-off, which was Meta and Microsoft both reporting well but being a little negative on the outlook. And in true short-term stocks ‘stuff’, Friday in the US was good for share prices as a weak jobs report hosed down fears that the world’s biggest economy will be growing so solidly that the Fed will reduce the number of rate cuts Wall Street was hoping for of late.

Mind you, six months ago, some ‘crazies’ in the US were talking about seven and even nine cuts. But the recent run of economic data put paid to those silly predictions. In fact, the economy there has been doing so well that some thought next week’s Fed rate cut could be cancelled.

More market well-adjusted types had accepted that the once thought 0.5% cut next week would shrink to 0.25%, and this jobs report certainly assures stock players that a cut is bound to arrive when the Fed meets, and Jerome Powell fronts the media on Wednesday.

Of late, fears that inflation wouldn’t fall as expected because the US economy was looking so strong helped bond yields rise, which explains why Wall Street and then our market had a seriously negative week. Adding to the need for higher interest rate or yielding bonds is the fear that Donald Trump and his promised tariffs would be globally inflationary.

But hot on the heels of a Personal Consumption Expenditure Index that came in at 2.1% in September after being 2.3% in August, this jobs report confirmed that US inflation isn’t sticky and is falling.

That was tick number one for optimists who believe US stocks should go higher as lower interest rates should power share prices up. Then this jobs report showed us that only 12,000 jobs were created, which is a shocker considering economists were expecting 100,000!

This was the weakest monthly reading since December 2020, when Covid closed down cities and economies. But against this bad labour market news, the actual unemployment rate held steady at 4.1%.

This from Clark Bellin, president and chief investment officer at Bellwether Wealth, was a neat summary of the market reaction to the numbers: “Friday’s jobs report showed that the labour market decelerated quite significantly in October compared to September, but this was a noisy number largely due to hurricanes and labour strikes, so it’s unlikely that this weakness is going to cause the Federal Reserve to pivot away from its expected 25 basis point rate cut at the November meeting”.

Yep, and that helped the stock market with four US most watched indexes (Dow, S&P 500, Nasdaq and the Russell 2000) all solidly in the green.

And yes, our market now is poised for a 42-point gain on Monday, underlining how driven we are by the headwinds and tailwinds coming out of the Big Apple.

All this adds proof to my argument that you have to be careful about the short-term winds coming out of Wall Street, as we batten down for what the US election on Tuesday, US time, will whip up for share prices. Expect turbulence and even a market maelstrom, but I bet it’s short term, with rates on the slide, thanks to falling inflation and the US economy growing but not booming.

That Goldilocks scenario of a ‘not too hot’ and ‘not too cold’ economy is a longer-term scenario that should underpin a nice stock price rise into 2025. Helping is an OK profit reporting story and overnight Amazon was a star, which followed Intel wowing the market. On Thursday, Meta and Microsoft had more negative outlook statements but that was then. Wall Street now is looking forward and not back!

To the local story this week and the S&P/ASX 200 ended lower by 41.2 points (or 0.5%) to finish at 8118.8. This was a 1.1% loss for the week and followed a loss last week.

The big news on Friday was Macquarie reporting worse than expected. This is how the AFR reported the story: “Financials were battered with Macquarie Group closing at a one-month low of $223.51 after tumbling 3.6 per cent. The investment bank’s profit for the first half of FY25 missed estimates and its dividend was reduced. The big four banks receded, with National Australia Bank hit the most, down 1.5 per cent to $38.21.”

Meanwhile, if your favourite energy stock went up, you can blame reports that Iran is readying itself to return fire on Israel and oil prices spiked! Meanwhile, the miners were helped by news that Chinese manufacturing came in better than expected.

The AFR again: “BHP rose 0.3 per cent to $42.78, Rio Tinto bounced 1.7 per cent to $121.33 and Fortescue also lifted 1.7 per cent to $19.49.”

To the stars and strugglers for the week.

To the Stars…

  1. Mineral Resources was up 21.37% to $40.61 on selling its oil and gas assets to Gina Rinehart.
  2. Pilbara Minerals was up 5.09% to $2.89.
  3. Premier Investments rose 6.7% after Solly Lew got his way at Myer.

And the Strugglers…

  1. Woolworths was off 9.37% to $29.80 on a profit warning.
  2. Treasury Wine Estates was off 5.36% to $11.12.
  3. Star slumped 15.73% to $0.23 on an 18% fall in revenues.
  4. AGL was down 8.43% to $10.53 after Barrenjoey gave it an earnings thumb down.
  5. Megaport was off 5.02% to $6.81.

What I liked

  1. Good sense at last for home prices with the CoreLogic home value index rising 0.2% in October, while the previous monthly gain was also revised down a touch lower. Annual price growth dropped to 5.9% a year, down from a peak of 10.9% a year in Feb.
  2. The CPI numbers which helps us believe that a rate cut in February is looking more likely, despite silly calls out there on the first cut being May, September or 2026!
  3. Australia’s third-quarter producer prices index climbed 3.9% year-on-year, sharply lower than the 4.8% reading in the previous quarter.
  4. Australian retail spending inched up 0.1% in September after climbing 0.7% in August. The 0.1% rise is a better sign for the RBA to believe that their 13 rate rises are working.
  5. The Personal Consumption Expenditures price index, which is the Fed’s preferred inflation gauge, showed prices rose 2.1% for the year ended in September, a slowdown from 2.3% in August, according to Commerce Department data released Thursday. (CNN)
  6. Gross domestic product increased at a 2.8% annualized rate in the third quarter, below the 3.1% estimate and the 3% reading of quarter 2. The less-than-expected growth is good for more Fed rate cuts.
  7. The Caixin China manufacturing purchasing managers’ index for October came in at 50.3, beating a median estimate of 49.7 in a Reuters poll of economists, and rebounding from September’s 49.3. (A reading below 50 shows contraction in manufacturing, while one above that indicates expansion.)
  8. The headline index of the Conference Board survey in the US leapt to 108.7 in October, from an upwardly revised 99.2 in September, well above the consensus of 99.3.

What I didn’t like

  1. The CBA’s economics team looked at the CPI and changed their December cut call to February. It does look right but I’d prefer a December cut because I think the RBA has waited long enough.
  2. The UK Chancellor announced a budget high on tax hikes, but also higher on borrowing.
  3. The uncertainty of the US election and its market implications.
  4. NAB researchers say: “Political uncertainty is impacting manufacturing activity and hiring plans according to the second-tier Dallas Fed Manufacturing Survey. The headline index rose to -3 from -9. Anecdotes highlighted election uncertainty: “Geopolitical conflict and aggression wreaks havoc with our planning. Our own election outcome cannot be known soon enough. We have prospective deals of significance on hold pending who takes office.”
  5. 70% of US S&P companies have reported September quarter earnings and results have been okay but softer than for recent quarters. So far, 75.5% of results have surprised on the upside, which is just below the norm of 76% and the consensus earnings growth expectation is for 5.9% year-on-year. The final earnings growth number should come in around 7% year-on-year, down from 11.6% year-on-year in the June quarter but still solid. (These are OK, but I would’ve liked them to be stronger, given how much Wall Street has climbed in the past two years.)

Another big week for stocks ahead

Strap on your seat belts for a week with headwinds and tailwinds bound to be doing battle with the US election set to compete with the Federal Reserve’s interest rate decision. Locally, the market will hang on every word from RBA Governor Michele Bullock, hoping to see if a rate cut is likely in February. Of course, she will be competing for attention with the four-legged lottery called the Melbourne Cup. In case you’re interested, historically speaking and surprisingly, the stock market does best when there is a Democrat President, and the two opposing parties have control of either the House or the Senate.

 

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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

After the CPI, Westpac’s economics team wrote: “Following this data release, Chief Economist Luci Ellis affirmed Westpac’s view that the RBA’s rate cutting cycle will begin in February 2025. Importantly, Q3 trimmed mean inflation was broadly in line with the RBA’s own forecasts…”

(Luci was Assistant Governor at the RBA before taking on the Westpac job.)

 

Chart of the Week

Headline Inflation in the zone! However, we need to see underlying inflation in the 2-3% band ASAP.

 

 

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.