[table “137” not found /]
In a week when the world seems preoccupied with two things – the Fed’s first interest rate rise in nearly a decade and the new Star Wars movie – The Force Awakens – the story will go down in history book as the “Return of the Fed-i”. (The letter “i” in economics is often used for interest rates and Fed-i reminds me of Jedi. That’s how my crazy thinking goes, with Return of the Jedi being the last good Star Wars movie made, though they say the latest effort is pretty good.)
Certainly, the force has been woken up, with the Fed now back to doing what we expect a central bank to do – tweak interest rates to influence an economy. Of course, the Fed has promised to wake up pretty slowly and that’s why markets have liked what Janet Yellen said this week. Even so, the market reaction doesn’t look enthusiastic enough to bring a Santa Claus rally to town.
We’re going to need at least 400 points in a week or so and I don’t think Santa has enough helpers out there to make that happen.
In case you missed it, I’ve looked at the history of these rallies, so let me summarize it in a nutshell.
The 2015 Stock Trader’s Almanac reveals that the Santa Claus rally has come up with positive pay-offs for investors in 34 of the past 44 holiday seasons. The period in question covers the last five trading days of the year and the first two trading days after New Year’s.
The average cumulative return for this period is 1.6% for the US stock market but December has consistently been a great month for our market too.
And if you go back to 1896, for the Dow Jones Industrial Average, the average gain is 1.7% and it happens 77% of the time.
AMP’s Shane Oliver was rooting for a Santa Claus rally early in November when he said: “Shares are cheap relative to bonds; monetary conditions are set to remain easy and the Fed is unlikely to do anything to threaten global growth. This in turn should help see the global economic recovery continue.”
This basic story still holds but we just don’t have a positive shot-in-the-arm stimulus to get Santa’s magic working. The reaction to the Fed was heartening that markets did not overreact to the first rate rise but it does come as US economic data has turned a bit “iffy”.
In the week ahead, there’s a load of important US economic data that could usher in some surprisingly good news but
a) I don’t expect anything great; and
b) even it was good, I don’t think it could over-excite a currently underwhelmed stock market.
We’re now in the hands of the two big E’s – economics and earnings – and until we see some really good news (which I think we’ve seen here but too many ‘experts’ doubt its veracity because of ABS question marks), it might mean the Santa Claus rally will come in February!
Of course, it will be just a plain old rally but I think I’ll call it the “overdue Santa Claus rally”, as I believe the makings of a better year for stocks are coming together now but the market wants more proof. OK, I get it but it’s sometimes hard to be right too early!
Of course, the weakness in oil and other commodity prices is a big governor stopping enthusiasm for stocks. We need either new supply decisions by the likes of OPEC or some big, positive signs that global demand is coming in on the higher-than-expected side.
What I liked
- The Fed decision and the initial market reaction.
- This from the Fed: “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” Without this, the market reaction could have been very negative.
- US housing starts rose from a seven-month low, up by 10.5% in November. Single-family housing starts increased by 7.6% to a 768,000-unit pace – the highest reading since January 2008. Building permits rose by 11% in November.
- Reading an online local news paper while I swan around Paris that Treasurer Scott Morrison got back to talking about growth and jobs this week, rather than all this negative stuff such as GST, taxes and slugs on super! Keep it positive, Scott!
- The US dollar actually fell on Friday, which is a good thing, as there are experts who think this will be a trend this year, which will help commodity prices, as I’ve argued before.
What I didn’t like
- The Yanks selling off again on Friday, which means we’ve removed one uncertainty, namely the procrastinating Fed. However, we still have too low oil prices, as well as question marks over economics and earnings! Bah humbug!
- The Philadelphia Fed business index fell from 1.9 to -5.9 in December. US leading indicators index eased from 0.6 to 0.4 in November.
- Industrial production in the US fell by 0.6% in November, as unusually warm weather caused a sharp drop in demand for utilities.
- The persistent weakness in energy and commodity prices!
- The Government expects the economy to grow by around 2.5% this year, down from the 2.75% rate assumed in May with the release of the Federal Budget. Estimated growth in 2016/17 has been cut from 3.5% to 2.75%. (I bet they’re wrong and we grow better than these guesses.)
- Stupid advice from so-called business leaders and loser politicians, who want the PM to go to an early poll! Elections can KO investment and confidence and we don’t need politicians trying to save their skin at the expense of the economy.
Had to share these two
Canadians are thinking outside the square by actually selling fresh air in cans and the Chinese are actually buying them! And the French are protesting at the Uberization of their tour guides! I saw a big street protest near the Louvre and it shows that taxis are only the tip of the iceberg when it comes to uberization, which could affect the companies we invest in.
A fund manager I dined with in London earlier this week said you should back the dominant in many of these disrupted industries because only one prevails in the new digital age. He says the FANGs are winning and will keep on winning. FANGS? Facebook, Amazon, Netflix and Google. And perish the business that gets in the way of their fangs! And dare I say, use the fang, Luke, use the fang?
Top stocks
[table “136” not found /]The week in review
(click the blue text to read more)
- Early in the week [1] I gave you my stocks worry update, but it looks like Yellen donned the red suit and pathed the way for that damn, overdue Christmas rally!
- Paul Rickard gave you his final article [2] in the series Investing for your kids or grandchildren. He looked at insurance bonds and education savings plans. Click here [3] for the first article and here [4] for the second.
- James Dunn explored his four top industrial stocks for 2016 [5] – including AV Jennings (AVJ), Greencross (GXL), Programmed Maintenance Services (PRG) and Fisher & Paykel Healthcare (FPH).
- The brokers [6] upgraded retailer JB Hi-Fi (JBH) and Regis Healthcare (REG). In our second broker report [7] for the week, Suncorp and BHP got upgrades.
- Our Super Stock Selectors [8] liked Carsales.com (CAR) but disliked Medibank Private (MPL).
- Charlie Aitken told us why the Fed finally got it right [9] with its dovish rate hike commentary.
- Tony Featherstone gave us an update on his takeover targets lists [10] and Ansell and 3P Learning both received a mention.
- Retired Qantas pilot Richard McDonald gave us a sneak peek into his very own SMSF [11] and told us why he likes the big four banks and businesses like Sydney Airport.
- And William Fettes from DBA Lawyers gave you an update on the rule changes [12] applied to collectables and personal use assets from 1 July 2016.
What moved the market
- The US Federal Reserve raised the range of its benchmark interest rate by a quarter of a percent to between 0.25% and 0.50%. Wall Street rallied on the back of a dovish statement that said future rises would be gradual.
- Not only did Wall Street rally, but the local bourse soared on the news– jumping 1.5% on Thursday. That followed a near 2% rise on Wednesday on the back of bargain hunters buying in.
- A slide in commodity levels dented a little of Wall Street’s enthusiasm by Thursday’s close.
The week ahead
Australia
- December 31 – Private sector credit (November)
Overseas
- December 22 – US GDP (September quarter)
- December 22 – US FHFA home prices (October)
- December 22 – US Existing home sales (November)
- December 23 – US Personal income (November)
- December 23 – US University of Michigan Sentiment (Dec)
- December 23 – US Durable goods orders (October)
- December 23 – US New home sales (November)
- December 29 – S&P CaseShiller Home prices (October)
- December 29 – US Consumer sentiment (December)
Calls of the week
- Australian company Domino’s has secured a bigger slice of the German market by acquiring the largest pizza operator in Germany, Joey’s Pizza, in a joint venture with Britain’s Domino’s Pizza Group.
- The Government’s mid-year economic and fiscal outlook (MYEFO) made the call to downgrade the economic growth forecast for 2015-16 from 2.75% to 2.5% and 3.25% to 2.75% in 2016-17.
- Tony Featherstone said Ansell and 3P Learning meet the criteria for the Switzer Super Report takeover target list. [10]
- And Janet Yellen, yellen “lift off”, certainly gets a mention!
Food for thought
He puzzled and puzzled till his puzzler was sore. Then the Grinch thought of something he hadn’t before. Maybe Christmas, he thought… doesn’t come from a store. Maybe Christmas, perhaps… means a little bit more!
– Dr. Seuss
Last week’s TV roundup
- This week, we revisit an interview [13] with Charlie Aitken from Aitken Investment Management. He shares the stocks on his watch list.
- To talk about the success of Blackmores over the past couple of years, the company’s Australia and New Zealand MD, Dave Fenlon, joins the show [14].
- For his view on what global financial markets are doing right now, Ben Griffiths of Eley Griffiths Group speaks to Marty Switzer [15].
- And as Australians embark on their $18 billion Christmas spending frenzy, changes proposed by the RBA to unnecessary card payment transaction fees means consumers would save an estimated $200 million a year. Tyro Payments CEO, Jost Stollmann [16], joins the show.
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.
This week the biggest mover was Super Retail Group with a 3.48 percentage point increase in the proportion of its shares sold short from 7.40% to 10.89%.
[17]My favourite charts
Wall Street liked the dovish hike
[18]Source: Fairfax, Bloomberg
The market likes certainty. Here’s how the S&P 500 reacted to Yellen delivering her take on the FOMC’s monetary policy decision. Is this the start of a Santa Claus rally?
Lower for longer
[19]Source: Federal Reserve [20]
This chart shows an appropriate projected and gradual increase of the US cash rate according to FOMC participants. Each plot point is an individual FOMC member’s judgement of the “midpoint” of an appropriate target range.
Top 5 most clicked on stories
- Peter Switzer: This is a stocks worry update! [1]
- Charlie Aitken: The Fed finally gets it right [9]
- James Dunn: 4 top industrials for 2016 [5]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [6]
- Charlie Aitken: The dovish hike [21]
Recent Switzer Super Reports
- Thursday, 17 December, 2015: It’s lift-off! [22]
- Monday , 14 December, 2015: How worried should we be? [23]
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.