It’s been Thanksgiving in the States but as someone who feels the heartbeat of every move the stock market makes, I can’t see much we should be thankful for. Only two weeks ago, we got rid of one big market negative – the US mid-term elections – but that wasn’t enough to turnaround the negative sentiment.
In case you don’t specialise in the opening and closing times of the New York Stock Exchange, I should tell you that the world’s most watched ‘money machine’ closes at 1pm, with many Americans taking a four-day break with Thanksgiving. Unlike most Saturdays affected by daylight saving, when I write this note, I know the Dow finished down 178 points, which means this was the worst Thanksgiving week since 2011. And that’s the worst Black Friday showing since 2011, CNBC tells me. And despite that, stocks rose more than 6% that year, and if you add in dividends, it was creeping close to 9%. Interestingly, this was the year that the US government lost its AAA-rating!
The epicentre of the US market slide – the re-evaluation of the FAANG stocks – continued overnight and their price reassessment is clearly linked to uncertainty about the global demand for the stuff they sell. And the fingerprints on this ‘crime’ against stock market optimists goes back to Donald J. Trump and his trade war with China. It has links to a possible slower growing US economy in 2019, which was the surprise headline of this week from a number of US investment bank economists. It’s still a minority view but the supporters are growing in number.
Apple, which was often talked about as being more a real company making stuff and importantly making profit, unlike some of the FAANG stocks, is down 25% since it’s top on 3 October when it was $232!
That’s repricing on steroids.
Adding more pressure to bulls on Wall Street was a 6% fall in the oil price. This happened despite talk out of OPEC that production cuts were on the way. I think the new views emerging on the outlook for the US economy has to have a demand for oil effect, which adds to the oversupply issue. However, the lower price determiners today might be wrong next week and be buyers then! That said, I would have preferred to see a small rise on the news that supply will be trimmed.
One good sign out of the Black Friday trade was the rise of the retail ETF – the SPDR S&P Retail (XRT) – which rose 0.3%.
(For those wondering why Black Friday is called Black Friday, it’s because it’s the day US retailers get out of the red and into the black, with the start of festive shopping season.)
And in case you’re wondering why stocks have all gone so badly lately, just look at these reasons that I came up with this week to explain why our market, in particular, has ignored the great economic readings and has headed lower. So, here goes:
- The Trump-China trade war.
- Rising US interest rates.
- Question marks about the EU’s, Japan’s and China’s economic growth.
- New concerns about US growth.
- Brexit anxiety.
- US valuations of FAANG stocks needed to be more realistic.
- Oil prices falling to the lowest level in over a year on oversupply or is it under-demand or geo-political scandals out of Saudi Arabia?
- APRA’s serious lending restrictions on our banks.
- The Royal Commission’s impact on bank share prices, banks willingness to lend and the future policy implications from the Government and Labor, which looks likely to form government next year.
- Leadership and the revolving door of Prime Ministers.
- The rising cost of energy. Power prices are not only hurting the consumer, the share prices of listed companies’ headed south because of huge spikes in costs and slumps in profit.
- Government decisions to interfere in pricing for the likes of power companies and inquiries into sectors, such as aged care.
- House price collapse concerns and its impact on consumers and growth.
- The NBN and what has happened to the profitability of telcos, such as Telstra.
And you wonder why stock prices are having difficulty with gravity! That said, I believe gravity will be beaten and the gravitas of a solid US economy and good profits will eventually help stock prices head higher. I know hope isn’t a good investment strategy but I do hope Presidents Donald Trump and Xi Jinping crack a trade deal, as this will be an enormous fillip to market confidence.
As someone who’s rooting for a Santa Claus rally in December, purely for money reasons, it’s worth noting that our S&P/ASX 200 index only lost 0.3% or 14 points (for the week) to end at 5716.2. All the market-rattling problems out there explain the negativity but considering how many headwinds there are, it wasn’t a bad effort. I think it says that a lot of smarties know there’s a lot of value created since the sell- off.
One hedge fund manager I interviewed this week said he had 40% cash seven weeks ago but now has 5%! Clearly, he is not in the camp that argues this correction is a prelude to a crash.
Not helping is our tech sector, which has had a good year until recently. They rode up with the FAANG stocks and now they’re riding down with their US buddies. This is how the AFR summed up their week: “Wisetech shares slipped 2.7 per cent to $15.99, Altium fell 11 per cent to $21.26, Afterpay Touch slid 12.4 per cent to $11,29, Appen closed 5.5 per cent lower at $12.27 and Xero closed at $37.29, falling 11.2 per cent this week.”
This fear and loathing isn’t over yet but the Trump-Xi clash in Argentina at the G20 meeting next Friday will be critical to the stock market going forward and our investments.
What I liked
- The minutes from the 6 November RBA Board meeting were issued. While no rate change is expected any time soon, the Board continues to believe that the next move in rates will be up. Board members see risks of a bigger decline in the jobless rate and thus risks of higher wage growth.
- The IMF said that “The [Australian] economy’s strong growth momentum is expected to continue in the near term. Notwithstanding recent strong growth, it is not yet the time to withdraw macroeconomic policy support given remaining slack.”
- The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 0.7% in trend terms in October – the 20thmonth of sales growth. Spending is tracking above the 0.4% average long-term monthly pace of sales growth. The annual trend growth in sales eased from 10.5% to 10.4% in October, although it remains above the long-term average pace of 5.6%.
- According to the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 6.2 cents a litre last week to 143.1 cents a litre. Petrol has fallen 17.4 cents over the past three weeks – the biggest equivalent decline in a decade.
- The minutes of the European Central Bank’s October 24-25 meeting policymakers said: “It was important to emphasize that the incoming information, while somewhat weaker than expected, remained overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation.”
- The UK European Commission and Britain agreed on a draft text for future EU-UK ties after Brexit and it was good to see European stock markets finish higher on Friday, despite Wall Street’s continued negativity.
- Italian banks eased by 0.2% as Italy’s bond yields dropped on hopes of a compromise between the Italian government and the European Commission.
What I didn’t like
- The ANZ-Roy Morgan consumer confidence rating fell by 1.7% to 117.8 in the past week but the index is well above the average of 114.2 held since 2014, and above the longer-term average of 113 held since 1990.
- The local Internet Vacancy Index fell by 0.5% in October – its seventh consecutive monthly decline but the index is 0.6% higher than a year ago and a huge 28.3% above its 2013 low.
- The NAHB housing market index in the US fell from +68 to +60 in November (forecast +67) – the biggest fall in almost 5 years.
- Goldman Sachs reduced its price target on Apple (-4.8%) on concerns over iPhoneXR demand.
- The European Commission’s consumer sentiment indicator fell to the lowest level since March 2017 at -3.9 (survey: -3) in November from -2.7 in October.
- US durable goods orders fell by 4.4% (survey: -2.5%) in October.
- The OECD has forecast that global growth will slow from 3.7% in 2018 to 3.5% in 2019 (previous: 3.7%) and 2020.
Likes -v- Dislikes
The score was 7-7 and I always told you that I’d alert you if the dislikes were starting to swamp the likes. This isn’t a trend yet but we are hearing talk about a slower Europe, Japan, China and even this week Goldman Sachs suggested the Fed’s rate rises will add to a US slowdown next year. I should say a couple of these dislikes were only short-term negative developments, but they still bear watching to see if a trend is on the way.
The Week in Review:
- Some of Australia’s best fund managers got together in Melbourne last week and here are the stocks they really like [1].
- When global funds management giants start launching active ETFs, it is time to sit up and take note? Paul Rickard has the answer [2].
- Tony Featherstone [3] looked at 4 ‘hardship’ stocks that could benefit if the trend towards increasing financial pressure on borrowers continues.
- Managing Director at Fairmont Equities, Michael Gable [4], shared his thoughts on whether there will be a Santa Claus rally and how CBA and BHP will fare.
- Graeme Colley [5] highlighted the different options for help that are available with your SMSF
- These are the issues [6] we need to consider for the Switzer family’s SMSF.
- In the first Buy, Hold, Sell – what the brokers say [7] of the week, underlying momentum for Australian companies listed on the ASX seemed to have turned for the worst, and in the second edition [8], there were 7 stocks in the good books.
- IVE Group (IGL) was selected as Stock of the Week [9] by Mark Christensen, Fund Manager, Pengana Australian Equities Income Fund.
- Our Hot Stocks [10] this week were Baby Bunting (BBN) and Flight Centre (FLT).
- And in Questions of the Week [11], we responded to reader questions about spouse super contributions & the BHP buyback.
Top Stocks – how they fared:
What moved the market?
- Concerns over trade and tech stocks dragged on the market.
- Oil prices reached one-year lows during the week.
- The big four banks all improved this week despite the final round of hearings for the banking royal commission.
Calls of the week:
- Paul Rickard said that active ETFs are the future [2].
- Michael Gable [4] believes resources like BHP will go for a run once sentiment turns positive again.
- Peter Cooper of Cooper Investments said US cable company Liberty Media Corp Series A Sirius XM (LSXMA) has a 68% upside over the next three years [1].
The Week Ahead:
Australia
Monday November 26 – Reserve Bank Governor Lowe speech
Monday November 26 – Reserve Bank Assistant Governor Kent speech
Wednesday November 28 – Construction work done (September quarter)
Thursday November 29 – Business investment (September quarter)
Friday November 30 – Private sector credit (October
Overseas
Monday November 26 – US Dallas Fed Manufacturing Index (October)
Monday November 26 – US Chicago Fed National Activity Index (November)
Tuesday November 27 – US S&P/Case-Shiller Home Price Index (September)
Tuesday November 27 – US Conference Board consumer confidence (November)
Wednesday November 28 – US Goods trade balance (October)
Wednesday November 28 – US Economic growth (Second estimate, September quarter)
Wednesday November 28 – US New home sales (October)
Wednesday November 28 – US Federal Reserve Chair Powell speech
Thursday November 29 – US Personal income/spending (September)
Thursday November 29 – US Federal Reserve meeting minutes
Friday November 30 – China official purchasing managers indexes (November)
November 30-December 1 – Group of Twenty (G20) summit, Buenos Aires
Switzer Stumper:
Which three countries on the African mainland begin and end with the same letter?
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:
As this chart from AMP Capital’s Shane Oliver shows, there have been four corrections since 2012, as well as one “gummy bear” market – where prices recovered within a year of falling 20%:
Source: Bloomberg, AMP Capital
Top 5 most clicked:
- The stocks in the hearts & minds of top fund managers [1] – Peter Switzer
- Will there be a Santa Claus rally and how will CBA and BHP fare [4]? – Michael Gable
- Buy, Hold, Sell — What the Brokers Say [7] – Rudi Filapek-Vandyck
- Are active ETFs the next gen of funds? [2] – Paul Rickard
- BHP’s buyback a “no brainer” for some shareholders [12] – Paul Rickard
Recent Switzer Reports:
Monday 19 November: Hearts & minds [13]
Thursday 22 November: Santa Claus rally? [14]
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.