If you had to guess, would you have expected our stock market to actually rise over the week? Yep, we were up 43.8 points (or 0.7%) on the S&P/ASX 200 index, to close out at 5939.5. And we can thank financial stocks, which did OK, considering the pressure they’ve been under since the Royal Commission took aim.
Have a look at these results, which make me happy, as I did tip to you that they look over-beaten up. CBA was up 1.3%, Westpac 1.5%, and what about AMP putting on 6.2%! When I suggested recently that this was one for the speculators, Paul Rickard reminded me of that great British TV show Yes Minister, saying to me: “Brave decision, Minister!”
Imagine if there were no trade war talks nowadays, with BHP down 2.2% for the week to $33.10 and Rio off 0.7% to $77.45.
Of course, the market volatility and the sell offs are more pushed by overseas forces because (as I’ve argued here before) the banks look like good value because they have been over-bashed because of the Commission’s implications and APRA’s actions.
I described these foreign forces as screwballs throwing curve balls at our goal to make money out of stocks. Apologies to those who might love some of these unusual people but they are causing market unrest and we’re losing money as a consequence.
I’m repeating these below because I want to stress that these are external influences on our market:
- Trump and the trade war.
- Fiscally irresponsible Italians talking about leaving the EU.
- Saudis who want to ‘weaponize’ oil prices because they’re being criticised for probably killing a Saudi/US citizen journalist.
- Market-hype talk that the US Fed will raise interest rates too quickly and could cause a recession; and
- The silly stock prices of the FAANG stocks, which include Facebook, Amazon, Apple, Netflix and Google.
Ironically, profit and the economy, the things that should count to US companies, continue to deliver.
Reporting season again was helped by better-than-expected numbers from the likes of American Express, PayPal, Honeywell, Procter & Gamble and Schlumberger. “The corporate earnings season is off to a strong start,” CNBC reported. “With more than 15 percent of S&P 500 companies having reported, 83 percent have topped analyst expectations, according to FactSet.”
But a new curve ball has been thrown late in the week, with the revelation that China grew at only a 6.5% pace in the third quarter, and history shows that when the world’s second biggest economy slows and stocks plunge, big US exporters suffer, explaining why the Dow dropped over 300 points on Thursday.
Interestingly, the Chinese slower growth pushed the Shanghai Composite up 2.4% on Friday because the thinking was that Government stimulus out of Beijing was expected to bump up economic activity.
Back to the local scene and I hate to say I saw it coming but I’ve said this here, on TV in the Final Count and on my Money Talks show that I suspected Afterpay would cop a curve ball from ASIC, the Government or Labor over the fact that it looked like a lender but was not governed by the Credit Act.
On Wednesday, as Fairfax reported: “Afterpay Touch shares closed lower, with most of the losses coming from a 19 per cent fall on Wednesday afternoon after news broke that Afterpay would be caught up in a Labor-sponsored Senate inquiry.”
Afterpay Touch (APT)
Source: finance.yahoo.com
This picture says it all and underlines what sovereign risk can do to a company! I’m sure this is a company with potential, especially when you factor in the overseas opportunities but the challenging black cloud of regulation was always something that stopped me getting on board, when I missed the early surges in its share price.
For next week, external forces again will be the key drivers for our market. If you don’t believe me, let me reveal that the AFR even has a headline in today’s paper that reads: “Australian economy powers along!” That’s my exclamation mark but I had to throw it in when a Fairfax publication makes you feel positive about our outlook. If we can muddle through November, with all those curve balls buzzing around and the US mid-term election results don’t spook Wall Street, then we might get a nice strong finish to the trading year in December.
That said, there are a lot of ‘ifs’ and ‘buts’ in my speculation. However, I’m kept positive based on the history that the mid-term election or second year is generally the worst year for stocks in a Presidential cycle, while the third year is the best!
Since 1942, the S&P 500 has gone up by 6% in the mid-term election year, while the average year return for the index is 9.1%.
By the way, those numbers partly explain why, on average, I’m positive on stocks.
What I liked
- This CommSec headline: “Jobless rate falls to 6-year lows of 5% in NSW & Victoria jobless rates fall to decade lows!”
- In trend terms, the unemployment rate for 15-24 year olds hit a 7-year low of 11.2%.
- The ANZ-Roy Morgan consumer confidence rating rose by 1.9% to 119.5 in the past week. The index is comfortably above the average of 114.2, held since 2014, and above the longer-term average of 113.1, held since 1990.
- Over the year to August, a record 1,435,700 tourists came to Australia from China, up by 7.7%. A record 343,700 Indian tourists travelled to Australia over the year to August, up by 19.8%. And a record 199,400 Indonesian tourists visited Australia over the past year, up by 6%
- Reserve Bank Deputy Governor Guy Debelle delivered a speech: “The State of the Labour Market” at the Citi Investment Conference in Sydney. Dr Debelle concluded that “the near-term indicators suggest demand for labour remains above average and the expected growth in the economy over the next few years should gradually reduce the spare capacity in the labour market.”
- US industrial production rose by 0.3% (survey: +0.2%) in September.
- This from the Fed: “Participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion.”
- In the US, the Conference Board Leading Index rose by 0.5% (survey: +0.5%) in September.
- Despite the Trump trade war, the Chinese still go shopping, with retails sales rising at a 9.2% annual rate in the year to September, (forecast: +9%), up from 9% in August – the fastest annual growth rate in 15 months.
- Italy’s FTSE MIB index fell by 1.9%, pressured by rising Italian government bond yields, with the 5-year yield up by 19 points to a 5-year high of 3.15%, after European Central Bank President Mario Draghi increased pressure on the Italian government to rein in its budget ambitions.
What I didn’t like
- Our participation rate fell from 65.7% to 65.4% (seasonally adjusted) but the trend participation was steady at 65.6%.
- Total new lending commitments (housing, personal, commercial and lease finance) fell by 1.5% in August to $69.3 billion. And commitments are down by 4.2% on the year.
- According to the Australian Institute of Petroleum, the national average price of unleaded petrol rose in the past week by 1.8 cents to 157.6 cents a litre – the highest level for over 4½ years (the highest prices since the week to 5 January 2014).
- US housing is going off the boil as rates rise, with housing starts falling by 5.3% (survey: -4.5%) to 1.201 million units in September. Building permits fell by 0.6% (survey: +2.1%) to 1.241 million units in September. Weekly MBA mortgage applications fell by 7.1% to October 12.
- The trade war effect, with the Chinese economy growing at a 6.5% annual rate in the September quarter (forecast: +6.6%), down from 6.7% in the June quarter – the slowest annual growth rate in 9½ years.
My market “Quote of the Week”
I know I said there were a lot of curve balls tossed by screwballs out there that are making some big market players duck for cover, explaining why stocks are giving into gravity. I also could throw in mid-term election question marks as another unsettling matter but this observation best explains why Wall Street is looking vulnerable: “This whole thing started a few weeks ago when [Federal Reserve] Chairman Jerome Powell said we’re a long way from neutral,” said Brent Schutte, chief investment strategist for Northwestern Mutual Wealth Management. “What we’re seeing here is a good old fashion valuation repricing.” (CNBC)
Yep, you can’t keep saying a stock market looks overpriced and then not expect a repricing when interest rates rise and are likely to keep on rising.
The Week in Review:
- Yes, a share market tumble is scary, but you need to look for the bargains too. Here is why I think you should see this sell off as another buying opportunity [1].
- Paul Rickard had a good look at the Coles demerger and has some suggestions for how to play it. [2]
- Charlie Aitken thinks that banks are getting a bad rap and that it’s now time to buy [3] (something that both Paul Rickard and I agree with).
- Tony Featherstone examines whether or not it’s time to buy stocks in the aged-care sector [4] following the announcement of the terms of reference for its Royal Commission.
- With interest rates low, and set to remain so, this week James Dunn offered income investors three alternative sources of yield [5].
- Our Stock of the Week was international telecom operator KT Corporation [6], a Korean company giving its customers speeds 10 times faster than the NBN.
- In the first edition of Buy, Hold, Sell – what the brokers say [7] this week, Amcor Limited got two upgrades and Woodside Petroleum got two downgrades. There were plenty more upgrades in the second edition [8], including two for Fairfax Media
- In Questions of the Week [9], we looked at retirement and superannuation for the self-employed.
Top Stocks – how they fared:
What moved the market?
- Early in the week, Telstra was a drag on the market after a rough annual general meeting that saw 62% of shareholders voting against its remuneration report.
- Then local indices followed the US market as major American indices rose on the back of solid earnings results by blue-chip companies.
- Also news that a new Senate inquiry into payday lenders, debt management companies and buy now, pay later businesses (i.e. companies in the finance sector that didn’t fall under the Hayne Royal Commission’s remit) would probably get up, saw stocks in that sector fall, and then bounce.
Calls of the week:
- Charlie Aitken says it’s now time to buy Australian banks. [3]
- Political expert Malcolm Mackerras is predicting that independent Kerryn Phelps will be the next member for Wentworth after the weekend’s by-election [10]
- Former leader of the National Party, Barnaby Joyce, says he would take the leadership again if it were offered, as speculation of a challenge to current leader Michael McCormack mounts.
The Week Ahead:
Australia
Monday October 22 — CBA Business Sales Indicator (September)
Monday October 22 — Speech by Reserve Bank Assistant Governor Debelle
Tuesday October 23 — Speech by Reserve Bank Assistant Governor Debelle
Tuesday October 23-24 — Reserve Bank panel participation at the Sibos 2018 Conference in Sydney
Wednesday October 24 — Skilled internet job vacancies (September)
Friday October 26 — National accounts (2017/18)
Overseas
Monday October 22 — Chicago Fed National Activity Index (September)
Tuesday October 23 — Richmond Fed Manufacturing Index (October)
Wednesday October 24 — US FHFA home price index (August)
Wednesday October 24 — US New home sales (September)
Wednesday October 24 — US Federal Reserve Beige Book
Wednesday October 24 — US, Europe and Japan ‘Flash” purchasing manager surveys (October)
Thursday October 25 — US Trade in goods (September)
Thursday October 25 — US Durable goods orders (September)
Thursday October 25 — US Pending home sales (September)
Thursday October 25 — Kansas Fed Manufacturing Index (October)
Friday October 26 — US Economic growth (advance, Sept quarter)
Friday October 26 — US Consumer confidence (October, final)
Saturday October 27 — China Industrial profits (September)
Food for thought:
“An investment in knowledge pays the best interest.”
Benjamin Franklin
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:
The unemployment rate fell from 5.3% to 5% in September and total hours worked also grew 0.4% to be up 2.1% year on year.
Source: ABS, AMP Capital
Top 5 most clicked:
- Australian Banks – it’s time to buy them [3] – Charlie Aitken
- Why you should see this sell off as another buying opportunity [1] – Peter Switzer
- The Coles demerger – how to play it [2] – Paul Rickard
- 3 alternative sources of yield [5] – James Dunn
- Buy, Hold, Sell – what the brokers say [7] – Rudi Filapek-Vandyck
Recent Switzer Reports:
Monday 15 October: Make your day [11]
Thursday 18 October: The banks are back [12]
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.