Switzer on Saturday

The stock market has been the biggest show in town

Founder and Publisher of the Switzer Report
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It’s been a week of big stuff and in fact AMP Capital’s Shane Oliver actually used “This is big stuff…” when describing the Fed Chairman, Jerome Powell, virtually saying we won’t be stopping inflation even if it goes over 2%, which has been the central bank’s target since 2012. This is a big Fed commitment to economic growth and its why US bank shares spiked on the news.

This big decision by the Fed in part explains the big effort of Wall Street, which is up seven days straight. And we now see the Dow in positive territory for 2020! Also overnight we discovered that US consumer spending rose 1.9% in July, which was better than the Reuters survey forecast of 1.5%.

This is the best August for the Dow since 1984! That’s big!

Also big was the US and China reaffirming their commitment to the Phase One trade deal signed in January, which many worried about, given the Trump-Beijing battles of late. Clearly Donald doesn’t want to derail the US economic recovery before the November 3 election. Good on you, Donald!

On Trump, this headline from the SMH is a shock:

“Trump keeps re-election hopes alive with remarkable convention.” And then there was this from Matthew Knott, the paper’s reporter in Washington: “Trump remains an underdog, but after a successful convention he is still very much in the game, with two months left until election day.”

In other big news there were continuing solid signs of economic recovery in the US and there were numerous positive coronavirus vaccine and treatment news flashes to boot. Experts tell us that new global coronavirus cases have been trending flat for a month now and even emerging countries look like they could be rolling over, with better trends in Brazil, South Africa (which has gone from 13,000 new cases a day down to around 2,000), Pakistan, Mexico and Saudi Arabia.

Shane Oliver says “new cases are continuing to trend down in developed countries, led by a sharp decline in the US and to a lesser degree in Japan, offsetting a still rising trend in Europe.” And even Donald got some better polling news, though he still trails, with his Coronavirus mishandling working against him at the moment.

Source: The Financial Times

And the drug news keeps helping positivity, with European share markets recording their best gains in almost two weeks on Monday, after encouraging reports that said the US health regulator authorised the use of blood plasma from patients who have recovered from COVID-19 as a treatment.

On the local front, Shane Oliver concluded that “despite the huge hit to earnings and dividends, corporate results were not as bad as feared and most companies appear to be quite resilient.” Only 32% of results beat expectations compared to a norm of 44%, but beats outnumbered the 28% of companies that missed. This in turn saw 55% of companies’ share prices outperform the market on the day they reported, explaining why stocks are up for August.

As the chart above shows, we lost 52.4 points (or 0.86%) on Friday to close at 6073.8, but we’re up about 1.1% for the month. The Index isn’t being helped by the strength of the Oz dollar, which is now 73.55 US cents. And my currency expert Morgans’ Michael Knox says to get used to a rising Aussie.

Also the dollar didn’t help CSL this week, which fell 1.9% to $289.89. And CBA gave up 0.8% to finish at $69.09. The star of the week was Reliance Worldwide, up 32.75%, which shows what a slightly better report and outlook can do to a share price. And someone seems to know something about Corporate Travel Management, with the company seeing a 13.21% rise, despite a lack of travelling. (I liked the company for a longer-term play but I’ll take this early enthusiasm for the stock!)

No one would be surprised to learn Afterpay put on 12.4% for the week and is now $88.75. A few weeks back (July 11 to be precise), I told you Morgan Stanley had a $101 call on the stock but at the same time one analyst called it a $27 target!

The new Mr Reliable stock, Fortescue, put on 4.9%, following a nice report (profit up 49%) and a bigger-than-expected dividend.

The sectors in favour were IT (up 3.5%), Real Estate (1.05%), Financials (0.36%), Industrials (0.29%) and Consumer Discretionary (0.14%). On the outer, were Utilities (-4.78%), Energy (-3.42%), Healthcare (2.13%), Communications (-1.88%), Materials (-1.5%) and Consumer Staples (-1.25%).

As this was the final week for reporting, the outlook says earnings growth expectations for this financial year are little changed (up 8.9%). But note this, they’ve been revised up for resources and financials and down for industrials, particularly media, general industrials and utilities.

What I liked

  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 4.6% to 92.7 – the biggest increase in three months (long-run average since 1990 is 112.7). Sentiment is up by 42% since hitting record lows of 65.3 on March 29 (lowest since 1973).
  • According to the CBA, card spending in the week to August 21 was up 5.1% on a year ago, compared to a 3.6% lift for the week ended August 14. Online spending rose 26.2% on a year ago (previous week: +21.2%) but in-store spending was down 3.8% (previous week: – 4.5%).
  • The ABS survey of the impact of COVID-19 showed some improvement. “Fewer businesses reported a decrease in revenue in August (41%), compared to July (47%).”
  • Also from the ABS: “The proportion of businesses that expect revenue to decrease in September (28%) was lower compared to the proportion that reported a decrease in August (41%).”
  • In the year to July, the trade surplus was $77.2 billion, down from the record high of $87 billion set in the year to May. But that’s still a big surplus.
  • According to the Australian Bureau of Statistics (ABS), “The June survey showed a slight increase in the numbers of Australians who had received a Government stimulus payment in response to the COVID-19 pandemic, rising from 32% in May to 35% in June. The main use of the stimulus payment in June was to pay household bills (32%), which was a change from May when the main use of stimulus payments was to add to savings (29%)”.Victoria’s problems explain the increase. That’s to be expected. But the fact people aren’t panicking and saving money but instead are spending it, is good for the economy.
  • US durable goods orders rose by 11.2% in July, while the survey forecast was 4.3%.
  • Germany’s coalition parties agreed to extend measures to cushion the economic effects of the coronavirus crisis at a cost of up to 10 billion euros, while France is set to present its economic recovery plan on September 3.
  • German and French business conditions and confidence readings improved in August.

What I didn’t like

  • New business investment (spending on buildings and equipment) fell by 5.9% in the June quarter to be down by 11.5% over the year. Economists had tipped an 8.2% fall in the quarter, so it’s bad but not as bad as was tipped.
  • Construction work done fell by 0.7% in the June quarter. The value of construction work done is down by 2.2% on a year ago to 3½-year lows of $50.1 billion. Once again this is bad but not dramatically bad.
  • Residential building fell by 5.5% in the June quarter – the seventh decline in eight quarters. Work done is down 12.1% over the year – the biggest annual fall in 19 years. New residential work fell by 5.6% over the quarter, to be down 13.6% over the year to June – also the biggest annual fall in 19 years. This is big and is more consistent with recession talk.
  • The Australian Bureau of Statistics (ABS) reported that between the week ending 14 March 2020 and the week ending 8 August 2020, employee jobs decreased by 4.9% and total wages decreased by 6.2%. Jobs fell most in Victoria (-7.8%) across states and territories. Yep, Victoria best explains these numbers and it’s understandable.
  • The Chicago Federal Reserve National Activity index eased to 1.18 in July from 5.33 in June (survey: 3.7).
  • Market sentiment was negative on the stalled talks by US Congress on a fresh aid package for the jobless.

For those worried…

I know many of you might be concerned that the stock market and reality seem disconnected right now. If you are, consider the following:

  • The Coronavirus sell off was big because we didn’t know that the fiscal and central bank response would be so HUGE!
  • This virus-induced recession is the craziest recession I’ve ever seen, with retail sales going through the roof.
  • Vaccine news continues to be positive.
  • The worst of the recession is behind us and if Victoria avoided the second-wave drama, we’d have a better stock market.
  • A sell off is on the cards eventually but provided a vaccine looks likely, I’ll be telling you it’s a buying opportunity. And right now, Wall Street is totally in agreement with me.

The week in review:

Our videos of the week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday August 31 – Private sector credit (July)
Monday August 31 – Business indicators (June quarter)
Tuesday September 1 – Corelogic home value index (August)
Tuesday September 1 – Reserve Bank Board meeting
Tuesday September 1 – Building approvals (July)
Tuesday September 1 – Balance of payments (June quarter)
Tuesday September 1 – AIGroup manufacturing index (August)
Wednesday September 2 – National accounts (June quarter)
Thursday September 3 – International trade (July)
Friday September 4 – Retail trade (July)

Overseas
Monday August 31 – US Dallas Federal Reserve manufacturing (Aug)
Monday August 31 – China purchasing manager indexes (August)
Tuesday September 1 – China Caixin services (August)
Tuesday September 1 – US ISM manufacturing index (August)
Tuesday September 1 – US Construction spending (July)
Tuesday September 1 – US New vehicle sales (August)
Wednesday September 2 – US Federal Reserve Beige Book
Wednesday September 2 – US ADP employment (August)
Thursday September 3 – China Caixin services (August)
Thursday September 3 – US International trade (July)
Thursday September 3 – US ISM services (August)
Friday September 4 – US Non-farm payrolls (August)

Food for thought:

“Formal education will make you a living. Self-education will make you a fortune.” – Jim Rohn

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:

Top 5 most clicked:

Recent Switzer Reports:

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.