Donald Trump has become the confidence circuit breaker we clearly had to have, with the S&P/ASX 200 index finally beating the 5500 level. And Friday’s rise to 5560.6 has to give us heart that we might be able to kiss goodbye that bogey benchmark once and for all.
Let’s hope so but we have to accept that a bit of a sell off is always a chance after such a big run up since the November 8 election. Our index is up 7.8%, the S&P 500 has put on 5%, while the Dow is up 7%.
But these are nothing compared to the Russell 2000 small cap index, which is up 16%. And the S&P Mid Cap 400, which is up 12%!
No one expected this – not even the perceptive, the brave or the mad experts who tipped Donald to take out the prize! But who’s complaining?
The world economy needed something to shake us out of our post-GFC funk, where central bankers were doing their best to spark up a bit of growth. Now they have the dream-weaving Donald promising infrastructure spending, less financial regulation, less taxes and no fear about bigger budget deficits. Fast growth and productivity can KO deficits and so can standing up to overcharging contractors, such as Boeing.
Trump has created a world that’s spinning faster and more positively and few in the investing world want to get off. That said, next week will be an interesting test, with the Fed certain to raise interest rates and my expert buddies say the rate rise could even give another leg up to the stock market, though profit-taking before December 16’s decision wouldn’t surprise me.
On the other hand, this Trump-generated enthusiasm remains intense and, at the moment, it’s infectious, with even some European stock indexes up more than the usual US indexes that we always watch.
In case you missed it, since Trump (the President-elect) arrived, our market has been in a massive rotation out of the great mid-cap and small caps stocks that drove markets up, while the banks and big miners were as popular as Clive Palmer in Townsville. Now that’s all changed and this group of stocks is so important to the index. That’s why we’ve been able to crack 5500 and look likely to go higher.
CMC’s Michael McCarthy thinks we’ve breached a once troublesome technical level around 5530. If the Trump love continues, he thinks his 5900 call for the end of the year isn’t such a stretch.
What’s interesting (which came out of my interrogation of Macca) was the recent relook at some former great stocks that were dumped by fund managers wanting to take profit to get cash to buy banks and miners.
Together we concluded that because enthusiasm for stocks is on the rise, then new money on the sidelines and once in the bond market will find its way into the stock market. And many of the good companies beaten up recently could easily see some support, along with the banks and miners.
If this happens, the index will be powered by big caps, mid-caps and small caps, which could be very interesting for someone like me, who has been sweating taking out the 6000 level for too damn long! (On April 13, the index hit 5996.40 but it couldn’t hold it.)
From the ‘interesting news of the week’ category, Origin and Santos put their shareholders into a spin, with announcements of spin-off initiatives. However, there was no detectable excitement about the ideas, though the expert expectation is that the ‘new companies’ will be well received by the market, following the South 32 success.
What I liked
- This from the pretty smart RBA boss, Dr Phil Lowe: “In Australia, the economy is continuing its transition following the mining investment boom. Some slowing in the year-ended growth rate is likely, before it picks up again.”
- The market ignoring the Italian referendum.
- ANZ up 5% plus for the week, CBA up 2.6%, Westpac up 3% and the NAB 2.1% higher. You know I’ve been rooting for these guys for some time.
- Our trade deficit worsened by $269 million to $1,541 million in October but CommSec’s Craig James says “in trend terms, the deficit improved to a 20-month low of $1,565 million. The rolling 12-month deficit also improved from $32.5 billion to $29.7 billion (the smallest deficit in 13 months).”
- Government forecaster ABARES (Australian Bureau of Agricultural and Resource Economics and Sciences) expects a record winter crop of 52.4 million tonnes in the 2016/17 year.
- The weekly ANZ/Roy Morgan consumer confidence rating rose by 3.2 points (2.8%) to a 10-week high of 118.6 in the week to December 4.
- Job advertisements rose by 1.7% in November to 4½-year highs. Job ads are up 6.1% on a year ago.
- New motor vehicle sales totalled 98,937 in November – a record for a November month and up 0.3% over the year.
- In the US, the ISM services index rose from 54.8 to 57.2 in November (forecast 55.4). Any reading above 50 indicates expansion of the services sector.
- Consumer prices in China in November were up 2.3% over the year (2.2% forecast). Producer prices up 3.3% (2.2% forecast) – a 5-year high.
- The ECB said it would cut its asset purchases to 60 billion euros per month from next April from the current 80 billion euros, but adding asset buys will run until the end of 2017, or longer if necessary.
What I didn’t like
- The Bellamy’s story – the management team have soured their reputation with investors, with the stock price slumping around 45% in five days.
- That GDP number of minus 0.5% in the September quarter. However, as News Ltd.’s Terry McCrann pointed out, the surge in imports that reduces Net Exports and slows Real GDP growth was increasingly in capital goods, which is a good sign for investment in future growth.
- The trade deficit number, as it might make the December quarter another small negative and I’d hate my media mates to be able to genuinely use the R-word! (I will be testing out our December quarter growth signs next week on my TV program and in Switzer Daily.)
- The number of loans (commitments) for budding home owners (owner-occupiers) fell by 0.8% in October after rising by 1.5% in September. It was the third fall in lending in four months.
- Economy-wide sales watched by the CBA fell by 0.3% in the September quarter, after lifting by 1.2% in the June quarter (the biggest rise in 4½ years).
- The R-word for recession being dragged out too quickly. It’s as if some journalists are hoping for it so they can get some news excitement. Given how weak so many media outlets are, the last thing their bottom lines need, give their reliance on advertising, is a recession!
- The Italian referendum but, thankfully, the market shrugged it off.
So can it last?
The Fed rate rise test will be interesting but lately any possible road bumps, such as the Italian referendum, OPEC and the recent European Central Bank decision, were virtually driven right on over, with stocks going higher, just like Wall Street overnight. However, the big test will come in January, when Donald goes from being President-elect to the 45th President of the USA.
This stock market turnaround is a big bet of confidence in Trumponomics, so he has to deliver.
Also, we have to be careful that this current optimism doesn’t become unbridled euphoria because bull markets go higher on the former but die on the latter.
On Monday I’ll look at this rally and its legs in more detail.
Top stocks – how they fared
[table “241” not found /]The week in review
- I told you exactly what I’m doing with my BHP shares [1]!
- Paul Rickard recapped the performance of both our model income and growth-oriented portfolios [2] in November. In a month dominated by Trump news, both performed better than the market.
- James Dunn gave a run down [3] on how the industrial metal producers have performed – can their momentum be sustained?
- Our Super Stock Selectors [4] were keen on Westpac and CBA.
- Charlie Aitken [5] said November could have provided a taste of what’s to come in 2017, so be prepared to buy quality stocks during volatile periods.
- Tony Featherstone [6] provided his latest potential takeover targets.
- In Buy, Sell, Hold [7], Whitehaven Coal was among the upgrades, while Transurban was downgraded.
- In our second broker report [8] for the week, BHP and Carsales were in the good books but Bellamy’s was in the not-so-good books.
- ST Wong said Cleanaway (CWY) [9] has a market-leading position in the competitive waste management and recycling sector.
What moved the market?
- We played follow the leader to Wall Street after a number of key indexes hit record highs.
- The banks and miners led the rally.
- Weaker-than-expected GDP figures dented the Aussie dollar but had a muted impact on the market.
Calls of the week
- The RBA kept the cash rate on hold at 1.50%.
- Italy’s Prime Minister Matteo Renzi quit in the wake of the the ‘no’ vote.
- New Zealand’s Prime Minister, John Key, also called it quits after eight years in the top job.
- And Tony Featherstone placed Flight Centre on the takeover targets list [6].
The week ahead
Australia
Monday December 12 – Credit and debit card lending (October)
Monday December 12 – Lending finance (October)
Monday December 12 – Overseas arrivals and departures (October)
Tuesday December 13 – Weekly consumer sentiment
Tuesday December 13 – NAB Business survey (November)
Tuesday December 13 – Residential prices (September quarter)
Wednesday December 14 – Westpac consumer confidence (December)
Wednesday December 14 – New motor vehicle sales (November)
Thursday December 15 – Employment/unemployment (November)
Thursday December 15 – Finance and wealth (September quarter)
Thursday December 15 – Demographic data (June quarter)
Overseas
Tuesday December 13 – Chinese monthly data (November)
Wednesday December 14 – US Retail sales (November)
Wednesday December 14 – US Producer prices (November)
Wednesday December 14 – US Industrial production (November)
Wednesday December 14 – US FOMC Rate Decision
Thursday December 15 – US Consumer Prices (November)
Friday December 16 – US Housing starts (November)
Food for thought
Attitude is a little thing that makes a big difference – Winston Churchill
Last week’s TV roundup
- In recent months there’s been a sector rotation – the ones that were performing poorly have turned and have started to perform brilliantly! Can it keep going? To discuss, Paul Rickard joins Super TV [10].
- Is it time to take a bit of profit it you’ve made some money on the stock market? To share his views on this and more, Charlie Aitken from Aitken Investment Management joins the show [11].
- Is it the right time to increase exposure to foreign stock markets? Wayne Peters from Peters MacGregor shares his thoughts [12].
- And Michael McCarthy [13] from CMC Markets joined the show to share his views on where the market is headed and the stocks he likes right now.
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, Aconex was the biggest mover with its short position increasing 1.76 percentage points to 14.18%.
Source: ASIC
Chart of the week
The economy shrunk, but your confidence shouldn’t!
It was big news this week when the economy contracted by 0.5% during the September quarter – the first contraction in over five years. But like me, economist Craig James thinks this will probably just turn out to be a blip on the radar. The above chart help keeps everything in perspective.
Top five most clicked stories
- Peter Switzer: BHP: Take profit or ride it higher? [1]
- Charlie Aitken: Buy quality in volatility [5]
- Paul Rickard: Portfolios outperform in November [2]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [7]
- Tony Featherstone: Takeover targets – Online headwinds building for Flight Centre [6]
Recent Switzer Super Reports
- Thursday 8 December: Volatility in 2017 [14]
- Monday 5 December: Buy or bye-bye? [15]
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.