After the Yanks sucked up a shocking GDP number – a 1% fall, which was double the expectation – and personal income as well as spending was down in April, the S&P 500 still hovers in record high territory!
So what gives?
Well, there’s frozenomics, fine figures and freakin’ fear!
And when I add it all up making the inevitable deductions, it gives me an answer that says it’s still safe to play stocks, despite a sell off looking terribly overdue. These are historically unusual times.
Historically Unusual? Yep, with a capital H and a capital U, with monetary stimulation historically high, interest rates historically low, the S&P 500 at historical highs, the US bond market defying history in pushing yields down while stocks head up, and the European Central Bank set to make history this week bringing out the biggest bazooka that euro money can buy!
History could have some memorable events to record and for investors to chew over next week, with a HUGE slew of economic data in the US and here.
Sorry for being US-centric at the moment but with their market perched so high, there’s no way we can defy the leads from Wall St.
By this time next week, we’ll know how US manufacturing, construction and employment are going in the all-important second quarter (see below for the full list of stats due out next week). All the data will be for April and May and this quarter has to be a big boom, boom baby one for GDP to offset the frozen out first quarter, which produced a minus 1% growth number and gave birth to the term ‘frozenomics’!
If there isn’t a boom, boom result for growth, then it could easily be a stocks crash Craddock! (Apologies to anyone too young to get this pathetic play on words!)
You see, there are doubters who think the big freeze in the March quarter has been overplayed and argue a slowdown is happening. Today’s income and spending figures add to their case, as they are April numbers. These people would point to those not happy being in stocks who are now rushing to the bond market, which explains, to them, why yields are falling.
This is why the data next week will be a big market driver and the timing is oh so dramatic and typical of the whole stock market scene. Who says money is boring? It never sleeps! It seldom is straight with us and it can be up one day but hugely down another. Like many relationships, it’s complicated! On the other hand, it can be so rewarding and that’s why we stick with it. Like relationships.
Enough of that. Where was I?
So, I’ve explained the doubters take on an unclear reality. What about the optimists’ assessment?
It starts with a belief that the shocking weather January to March created a terrible GDP number and the June quarter will be rebound time. Growth numbers as high as 5%, which look too huge to believe, are out there from credible economists but a 3% number would suffice to keep bulls running.
And while the personal income figures weren’t great for April, most of the factory and production as well as housing data, are heading in the right direction. Even overnight, we found that the much-watched Chicago Purchasing Managers Index came in at 65.5 in May against an expert consensus tip of 61.
Throw into the mix the last China manufacturing figure being better than expected and the ECB’s expected actions on Thursday to give Europe another kick start, it could pay to stick with stocks, even if a short-term sell off comes. The data over the week could determine it all.
Just imagine a better than expected jobs number in the US meeting, a stimulus program from ECB boss Mario Draghi that excites the market, well that could send stocks skyward again.
Against that, we could see a ‘buy the rumour’ (European stocks have surged lately) and ‘sell the fact’ episode, creating a bit of a market slide. However, the longer term reaction to stimulus and good US numbers would be another big run for stocks, especially if a good growth number was then supported by better company earnings.
This is what I see looming to set us for a big finish into the end of the year.
This will be reinforced by the third year (2105) of a presidential election cycle, which is a great year for stocks, if you can rely on history. Meanwhile, I have a great take on this drift to bonds, which has been driving down yields.
It actually could mean that this bull market might have more legs than I once thought. You see, I love the Sir John Templeman quote/advice, which says: “Bull–markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
I suspect that this bond market thing says we’re not out of the skeptic stage yet, which I thought last year was a fair call. It now makes me think we MIGHT have both the optimistic and euphoric phases ahead.
Whatever is right, it means I’m not worried about the bull market being over any time soon.
On stocks, I heard Gary Hamel speak this week at a boardroom lunch. Hamel is regarded as one of the greatest business strategists in the world. He’s a prolific author and adviser to some of the biggest companies in the world. What he said, makes me think NAB has potential to surprise analysts and the many doubters out there. I know this is outside the square but NAB is the nation’s biggest business bank and I think business is set to turn the corner.
I also liked hearing from Marcel Von Pfyffer of Arminius Capital that he can’t see a correction locally until stocks get to 5700.
Finally, apologies to Monty Python pedants out there, like Paul Rickard, who noted my mistake last week! Yes, I said “and now for something entirely different” when I should have written “and now for something completely different.”
Of course, I could conclude with “I mentioned an inaccurate Monty Pythonism but I think I got away with it…” but that might be going too far.
Top Stocks – how the fared
Numbers that moved the market
Expected business investment in 2014/15 fell 12%, but there was a 9.3% increase in investment plans [1] in the March quarter compared with the December quarter, the most significant improvement in seven years!
American’s are a positive bunch at the moment, with the Conference Board Consumer Confidence Index [2] up from 81.7 in April to 83.0 in May.
The US economy contracted by 1% in the December quarter according to the second estimate from the Bureau of Economic Analysis at the US Department of Commerce [3]. Market players didn’t worry about it though – despite the news, the S&P 500 gained 10.25 points or 0.54% to 1920.03.
The week ahead
Australia
June 2 – AiG Performance of Manufacturing (May)
June 2 – RPData / Rismark House Price Index (May)
June 2 – TD Securities Inflation Gauge (May)
June 2 – Company Operating Profit (March Quarter)
June 2 – Building Approvals (April)
June 3 – Retail Sales (April)
June 3 – RBA Board Meeting
June 3 – Current Account Balance (March Quarter)
June 4 – GDP (March Quarter)
June 5 – Trade Balance (April)
June 6 – AiG Performance of Construction (May)
Overseas
June 1 – China official PMI (May)
June 2 – US ISM Manufacturing Index (May)
June 2 – US Construction Spending (April)
June 3 – US Vehicle Sales (May)
June 3 – US Factory Orders (April)
June 4 – US ADP Employment Change (May)
June 4 – US ISM services (April)
June 4 – US Federal Reserve Beige Book
June 6 – US Non-farm Payrolls (May)
It’s a big week for the local economy with the RBA Board meeting on Tuesday 3 June and GDP on Wednesday 4 June. It will be interesting to see how retail sales went during the month leading up to the Budget (June 3). We also get readings on manufacturing (June 2) and construction (June 6).
Overseas, keep an eye out for the China official PMI on Sunday 1 June and the US Federal Reserve Beige Book out on Wednesday 4 June. The big watch will be US employment data out on Friday 6 June.
Calls of the week
Charlie Aitken made the call that Qantas is a “trading buy,” and that we’ll see the stocks trade up to $2.00 [4] in the years ahead!
Tony Featherstone made the call that ResMed is a great long term portfolio investment [5] – we just have to keep our eyes open for the best buying opportunity as this bull market continues.
Clive Palmer rolled up to Parliament House [6] in his Rolls-Royce – a Phantom VI – but reportedly the classic car later ran into a spot of engine trouble.
And according to the Australian Financial Review [7], Alan Kohler, is not an economist despite being advertised as ‘chief economist’ of New Corp’s Eureka Report and Business Spectator. Kohler actually never studied economics.
Food for thought
When the facts change, I change my mind. What do you do, sir?
– John Maynard Keynes (there is doubt about whether Keynes actually said this, but if he didn’t say it, he should have!)
Last week’s TV roundup
Cleaning up your portfolio is a high priority as tax time sneaks up on us. In our special ‘Tax Time’ Super Sessions update, Peter Switzer and Paul Rickard give you tips on how to re-assess your portfolio sector allocations [8], and taxation impacts to consider.
All that pre-Budget talk spooked the retirement community, but were these anxieties justified [9]? To give his expert view on how retirees have been hit, National Seniors CEO, Michael O’Neill, joins Super TV.
Does Ron Bewley agree with forecasts predicting a correction to the S&P 500 and ASX 200? For a statistical analysis of the market and it’s sectors, Bewley cracks out the charts [10].
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 also shows how this has changed compared to the week before.
My favourite charts
In the March quarter, total Construction Work Done [11] figures lifted to a seasonally adjusted 0.3% after a 1.1% fall in the December quarter. For the same quarter, residential construction was up 6.8%!
Business investment [1] dropped 4.2% in the March quarter following a fall of 4.5% in the December quarter.
Top five clicked on stories
– Charlie Aitken: Qantas is not going broke – target $2 [4]
– Tony Negline – Everything you need to know about the Seniors Health Card [12]
– Paul Rickard – Seven super actions to take before the end of the financial year [13]
– Peter Switzer – Stocks to slide or a slow grind higher [14]
– Rudi Filapek-Vandyck – Buy, Sell, Hold – what the brokers say [15]
Recent Switzer Super Reports
– Monday 26 May – What if this time is different [16]
– Thursday 29 May – Charlie Charlie, quite contrary [17]