Switzer on Saturday

The rally rolls on

Founder and Publisher of the Switzer Report
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At the beginning of August, recession fears spooked Wall Street and took the Nasdaq down over 7% sending global markets lower as well. But the comeback rally continued this week and put the S&P 500 in line to register four months in a row on Friday’s rise!

By the way, that stock dumping wiped over 10% off the S&P 500, so that’s a comeback of memorable proportions.

That four-month rise happened and helping was another good data drop that I’ve been arguing would be critical to the overall trend for stocks. While volatility has to be expected as an economy transitions from fast growth and high inflation to a slowdown in production and job creation and less hyper pricing problems, stock prices will be less predictable.

However, the current consensus that a soft landing will bring at least three rate cuts for the Yanks is the driving force for this upward trend that I expect to be sustained into 2025.

That said, until November or so, we could cop share price volatility. That’s because of the upcoming US election and the history that markets can often “buy the rumour” of upcoming cuts and then “sell the fact” when the cuts earmarked for September actually happen. Also, there’s the other history that September and October can be negative for Wall Street for reasons that are not 100% clear but I think tax selling, which gets reversed later in the year, is part of it.

But wait, there’s more, with Wells Fargo investment experts telling us this: “Over the past six presidential election cycles, the S&P500 index has averaged a negative 4.3% return (median: -1.9%) during the two-month leadup to election day. Small- and mid-caps averaged similar losses”.

Thankfully, the Fed’s favourite inflation number i.e.

the personal consumption expenditures price index (or PCE) rose 2.5% for the year and matched forecasts by economists.

Reuters supported my take on the statistic with this: “The data looks unlikely to divert the Federal reserve, which tracks the PCE price measures as an inflation gauge for monetary policy, from lowering interest rates at least 25 basis points in September”.

Helping to hose down recession fears was a better

outlook for consumer spending. CNBC’s Jeff Cox reports that “Goldman Sachs on Friday raised its Q3 GDP tracking estimate to 2.7%, up 0.2 percentage points from its previous view” and that followed the PCE report.

Cox also pointed to “the Atlanta Federal Reserve’s GDPNow real-time tracker of incoming data, [which] raised its expected growth rate to 2.5% for the July-through-September period, up from 2.0% at the beginning of this week”.

The run of data has shown that optimistic economists have been more on the money than their pessimistic counterparts, which often attract more media attention.

This from the US-based Michael Green, chief strategist at Simplify Asset Management, sums up the mood of the US market player: “The equity markets are very much behaving as if everything is sanguine…there’s more evidence for the soft landing, and there’s less evidence that the Fed is going to cut aggressively.”

It’s a cliché but what we’re looking at is a Goldilocks scenario of neither a too hot nor too cold economy, but one that’s “just right!”

That’s one take and possible scenario. Here’s a more negative view from AMP’s Shane Oliver: “Shares remain at high risk of further falls and volatility over the next few months as: valuations remain stretched; investment sentiment is still relatively upbeat which is negative from a contrarian perspective; the AI boom in tech stocks is looking shaky with Nvidia down despite beating expectations;  recession risk remains high in the US and Australia; and geopolitical risk is high particularly around the US election and the Middle East; and September tends to be the weakest month of the year for shares.”

This is Shane being objective about the near-term future, but he still holds that the overall longer-term trend will be up after a time of volatility.

To the local story and the S&P/ASX 200 ended the week nicely higher, up 46.8 points on Friday but 68 points (or 0.85%) in the green for the week, finishing at 8091.90. That means for the past 12 months, anyone who has played the index via an ETF is around 10.88% richer plus 4% or so for dividends and with franking credits on top!

This was Oliver’s take on this reporting week: “Australian shares rose around 0.7% as investors looked through softish earnings results to help from lower interest rates eventually ahead with gains in property, finance and resources shares offsetting falls in IT and retail stocks.”

Reporting is over and Oliver says “38% of results have surprised consensus earnings expectations on the upside, which is less than the norm of 40%, but on the other hand 34% have surprised on the downside, which is also less than the norm of 41%.”

He added: “55% of companies saw earnings rise on a year ago, and this is below the norm of 56%. But don’t forget that falls in the level of profits in 2023-24 were concentrated in energy stocks, which explains why more companies report profits up than down”.

Here were the stars and strugglers of the week:

Stars this week

  1. Qantas up 5.34% after a bad report but it announced a $400 million on-market share buyback and hinted at a fully franked dividends in the second half of this financial year.
  2. CBA up 1.41% for who knows why!
  3. NAB up 3.12% ditto!
  4. Resmed up 7.2% on defying diet drug naysayers.
  5. Flight Centre up 4.59% on doing what it does well.

Strugglers this week

  1. Tabcorp off 21.62% on a $1.36 billion shocker loss report.
  2.  Ramsey Health Care down 11.01% on a negative outlook.
  3. Harvey Norman down 9.13% on lower profits.
  4. Mineral Resources off 11.27% on a poor report.
  5. Wesfarmers 4.48% lower on a poor outlook for Bunnings!
  6. Cettire off 27.59% on accounting problems!

What I liked

  1. August saw shares put in a strong recovery from the slump at the start of the month.
  2. Our July Monthly CPI indicator fell to 3.5% year on year, with trimmed mean inflation dropping to 3.8%.
  3. Apart from a few economists who fear being exposed for having faulty models of our economy, rate rise talk is vanishing.
  4. US June quarter GDP was revised up slightly to 3% annualised with stronger consumer spending. Initial jobless claims fell slightly, and consumer confidence rose in August, which is good to KO recession fears any time soon, but it could restrain the number of US rate cuts.
  5. The US June half earnings reporting season is now complete, with earnings up 11.6% year-on-year and 79% beating expectations against a norm of 76%.

What I didn’t like

  1. This from Shane Oliver on this week’s CPI and the RBA: “The July CPI is unlikely to change the RBA’s thinking, so it’s not going to drive another rate hike, but nor is it going to bring forward a rate cut.”
  2. Local retail sales were flat in July, defying expectations of a 0.3% gain and suggesting the tax cuts haven’t provided a boost to debt-laden Aussies, who used them to boost their savings and not for spending. (This is good news for rate cuts.)
  3. June quarter construction was weak. This also helps the case for rate cuts, but we have to be worried that our economy is weaker than the RBA thinks.
  4. Ditto for business investment, which was also far weaker than expected.
  5. The problem for US company reporting has been the fact that the profit beats, particularly for tech stocks like Nvidia, were less than many had hoped for and had been built into share prices.
  6. The German IFO business climate index fell again in August and screams rate cuts are need ASAP.
  7. Tech giant Nvidia reported and didn’t impress the market that has over-hyped this good company. But that’s what the US market often does.

Huge watches this week

The US gets a jobs report and if it’s stronger than expected, it could worry those sweating on the September rate cut, while if it’s weaker than tipped, recession fears could be ratcheted up. There’ll also be ISM data that will add to the views on the economy on whether we’re looking at a hotter-than-expected US economy, or a colder one or that ‘dear little Goldilocks’ one.

Locally, we see the June quarter GDP numbers on Wednesday, and it’s likely to show growth remains weak. A 0.2% figure for quarter-on-quarter growth is expected, which would give annual growth of a low  0.9% result year on year. But if it’s a weaker outcome, then the pressure on the RBA to cut sooner rather than later will rise.

 

Switzer This Week

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Switzer Report

Switzer Daily

 

The Week Ahead

Top Stocks — how they fared

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

CBA economics team: “Inflation eased to 3.5%/year in July, according to the CPI indicator. We continue to expect the August monthly CPI indicator to print with a two-handle.”

 

Chart of the Week


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.