Switzer on Saturday

The Trump rally continues but next week could be testing

Founder and Publisher of the Switzer Report
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Although Wall Street took a breather on Friday, the Trump-inspired rally has rolled on for another week, undoubtedly explained by profit-takers unable to resist pocketing some of the near 7% gains since the new president won the November 5 poll last year.

Over the same time, our market has snuck up only 3%. It certainly would have been more if core inflation had fallen quicker, and China’s economic recovery looked more credible. The former is tested on Wednesday when the Consumer Price Index (CPI) is released. A nice fall in core inflation will excite economists to predict a February rate cut, which will help stocks and probably spark the rotation I’ve been predicting out of big caps stocks into small- and mid-cap companies that will benefit from lower rates.

China did produce some better-than-expected economic readings last week, but economists are split on whether the growth comeback is sustainable. I’m betting on a surprise performance from the world’s second biggest economy and our most important trading partner.

However, this is all future stuff while the present is being lifted by Donald Trump and his promises, with commitments made at the World Economic Forum in Davos, Switzerland, to make the US central bank cut interest rates and pressure oil producers to drop their prices, which is all good news for stock market players.

Lower costs and greater liquidity in a global economy where inflation is falling and US company profits continue to beat expectations, all explain why stocks had a great week. However, it can’t be assumed that optimism can continue unchecked. And next week’s data drops could be the testing material for this rally.

The big data drops in the US will be consumer confidence on Tuesday, December quarter GDP on Thursday and the Fed’s preferred inflation reading i.e. the core PCE index, is out Friday.

Adding spice to all this, five companies out of the Magnificent Seven (i.e. Meta, Microsoft, Apple, Tesla and Amazon) will report. If they produce great results, this rally will have more legs. Of course, their outlook statements will be closely analysed by market experts. If they’re positive (with inflation still on the slide in company with solid economic growth), then this ‘Trumpilocks’ recovery and rally will defy pessimists who expect a sell-off.

While I also expect a sell-off, it mightn’t be a huge one. It could simply be a breather ahead of another leg up.

This rally will be threatened if US inflation spikes, interest rate cuts are cancelled, the Trump promises of lower taxes and less regulation don’t materialise and growth slows and threatens US company profits.

Also, if Trump tariffs are over-the-top, this could be a market killer. So far, however, the President’s noises have looked less market-worrying.

However, there will still be falling global inflation and lower interest rates and the prospect of a stronger China. And you should never forget the Artificial Intelligence (AI) boost that’s powering many company share prices higher. Only this week, CNBC reported that Meta’s Mark Zuckerberg announced in a Facebook post that the company plans to invest around $60 billion to $65 billion in capital expenditure this year as it builds out its AI infrastructure.

Right now, the positives outweigh the negatives and while being on board with this rally makes sense, I will be watching for signs that it’s get-out time.

To the local story and the S&P/ASX 200 put on 98.5 points (or 1.19%) to finish at 8404.9, with banks continuing to defy market experts who are predicting a big sell off for the big four darlings of our market. Meanwhile, the big miners lost ground but not by much. They’ve been helped by the comeback of the Oz dollar against the greenback. A lower US dollar is generally good for commodities.

Here are the stars and strugglers that moved 5% or more for the week:

 

The stars

  1. AMP is on the up, rising 11.21% to $1.79.
  2. Harvey Norman rose 5.53% to $4.96.
  3. Megaport’s re-loving continues, up 12.19% to $8.56.
  4. Yancoal gained 5.01% to $6.29.
  5. Pro Medicus put on 7.23% to $272.03.

The strugglers

  1. Coronado Global Resources down 12.15% to $0.67.
  2. Steadfast lost 5.69% to $5.69.
  3. Pilbara Resources down again, losing 6.29% to $2.31.
  4. Woodside slipped 5.41% to $24.48.
  5. Star Entertainment Group isn’t a star, off 14.81% to $0.12!

What I liked

  1. The level of housing starts rose 4.6% in the September quarter, taking them to an annualised pace of 173,000.

2.. Shane Oliver noted: “It’s early days in the US December quarter profit reporting season, with so far only 15% of S&P companies reporting results. But so far so good, with 82% beatings earnings expectations on the upside against a norm of 76%.”

  1. US consensus earnings growth expectations for the quarter are at 9.5% year-on-year, which is up from 8.4% at the start of the reporting season. This is a plus for stocks.

What I didn’t like

  1. The lack of economic data released here and overseas!
  2. Australian business conditions PMIs for January remained soft, with manufacturing improving and services softening. The employment component remained negative for the second month in a row and still warns of slowing jobs growth ahead. (Hope the RBA notes this!)

Big week ahead for the rally

We’re living through a special time for stocks and should be happy that markets are on the rise. While the uptrend won’t last forever, if we see lower inflation this week and Donald Trump doesn’t go mad on tariffs, this rally could keep making us money.

Switzer This Week

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Switzer Report

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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

Here’s AMP’s Shane Oliver’s take on the dollar, inflation and the RBA’s reaction:

“The $A has been hit since September by the return of Trump, a hawkish pivot by the Fed versus the RBA and concerns about the outlook for iron ore prices. We doubt the fall is significant enough to boost inflation much and shouldn’t stop the RBA easing in February if underlying (or trimmed mean) inflation falls as expected.”

 

Chart of the Week

The Diving Dollar!

 

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.