Switzer on Saturday

Trump rally is starting to lose steam

Founder and Publisher of the Switzer Report
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Now the Trump post-election rally must endure a reality biting phase, when profit-takers cash in on a market rise that while understandable was over-the-top. Yep, we’re now seeing a rational re-evaluation of what President Trump will deliver with his win on November 5, giving the Yanks a 2.16% gain. A week ago, it was 5.05%.

Ouch! Did I say reality bites?

But this isn’t just doubts over the net positive effects of the upcoming Trump era. Some of this pullback, which I’ve been tipping, is linked to the slightly higher-than-expected Consumer Price Index (CPI) reading this week, which was followed by Fed boss Jerome Powell saying this: “The economy is not sending any signals that we need to lower rates in a hurry”.

In case you missed it, the CPI for October (that was out on Wednesday) showed inflation came in at 2.6%, when economists were predicting 2.3%.

The Producer Price Index (PPI) was up 2.4% but the consensus estimate was a gain of 2.3%. Then the core PPI, which excludes food and energy, was up 3.1% year-on-year. As economists had expected 3%, we’re talking small misses. It probably reveals that the US economy is strong enough to resist a significant slowdown, but it also says (as Powell hinted) that the US might get fewer rate cuts simply because they don’t need them.

And that’s good in the real world of jobs, profits and business health, but it goes against some of the wilder calculations about where stocks prices should be heading.

To me, Americans are getting a sensible and desirable Goldilocks slow landing but there are Wall Street types who are excessively optimistic (which is a US thing) and now they might have to readjust their positivity towards share prices.

My view has been that the advances of US markets next year would be less because it has risen 30% in the past year. In contrast, I’ve argued that as we see rate cuts, our market could outperform the US, especially if China engages in a stronger economic recovery.

For the record, we’re up 17.38% for the year.

Not helping stocks has been Trump’s selections for his administration, with vaccine sceptic Robert Kennedy Jnr. head of the US Health Department and yes, drug companies such as Moderna and Amgen, lost 5% and 9% respectively on the announcement.

My US buddy Sam Stovall, who’s chief investment strategist at CFRA Research, summed it up succinctly for CNBC with the following: “Investors are catching their breath and evaluating whether the advance has merit. We really don’t see anything on the horizon right now to upend stocks, but investors are always sort of looking around to see what could cause the trend to end”.

The next few months will again be dominated by favourable or unfavourable data drops on inflation and the job market. Provided interest rate cuts happen, albeit slower than predicted by so-called experts, I think Wall Street will head higher, helped by the promise of lower taxes under President Trump.

Provided he doesn’t go stir crazy on tariffs too soon after taking power in January, instead using them as a bargaining chip for better trade deals with China and the European Union, then 2025 could be another good year for stocks.

To the local story and our S&P/ASX 200 rose 17 points (or 0.21%) for the week, but it wasn’t a convincing gain. Given the weakness on US markets on Friday, it’s no surprise to find SPI Futures point to a 40-point fall for Monday’s open for our stock market.

By the way, our market wasn’t helped by the job numbers that did nothing to get the RBA to cut rates this year and little to make us think a February cut is a sure thing!

Now let’s look at the ‘star’ stocks and strugglers for the week.

The shining stars…

  1. Megaport was up 11.23% to $8.32 for the week.
  2. Xero surged 9.09% to $172.61.
  3. Flight Centre put on 6.19% to $17.33.
  4. James Hardie rose14.16% to $56.51.
  5. Corporate Travel was up 10.38% to $13.72.
  6. Block added 13.73% to $128.52
  7. Pilbara Resources crept up 7.12% to $3.16.

And the strugglers…

  1. Northern Star lost 6.16% to $15.85 as Trump helped the US dollar gain fans.
  2. Life 360 fell 5.56% to $22.75.
  3. Mineral Resources was off 10.28% to $33.53.
  4. Paladin Energy slumped 24.5% to $7.29!
  5. Champion Iron was down 6.6% to $5.45.
  6. Fortescue gave up 5.49% to $17.73.
  7. A2Milk was creamed, losing 7.5% to $4.81.

What I liked

  1. The jobs report didn’t help rate cuts but does suggest we’re not heading towards a recession.
  2. The Trump rally easing up — we don’t need irrational exuberance.
  3. The Wage Price Index (the main measure of wages growth in Australia) rose by 0.79% in the September quarter 2024, which was the slowest quarterly pace since the March quarter of 2022. That compared with market forecasts for a 0.9% rise, so this is good for inflation going forward.
  4. October retail sales data for the US showed a 0.4% increase, slightly better than the 0.3% forecast from economists polled by Dow Jones.
  5. AMP’s Shane Oliver on China data: “Chinese economic activity data for October was on balance a little bit better than expected. Stimulus measures to boost consumer spending are still required though”.
  6. Small rises in business and consumer confidence again say our economy isn’t tanking.

What I didn’t like

  1. The perceived stronger-than-expected jobs report that works against the start of the rate cut process.
  2. Here are the key numbers: 15,900 jobs were added in October, the fewest since March’s 9,300 job losses, and below market forecasts for a 25,000 rise. But the RBA and the team of adoring economists want to see a bigger hit to the job market.
  3. Unemployment stayed at 4.1%. We need this to move higher to get the RBA in a cutting mood, which would help stocks, provided the rise isn’t so big that it suggests a recession is coming.
  4. Rising bond yields, which are anticipating higher inflation in the US because of Donald Trump’s policies, but the bond market is right until it’s wrong. And it’s often wrong!

The rate cut wait continues

Next week doesn’t bring market-hitting data drops but the focus will be on how the Purchasing Manager Indexes behave. Manufacturing readings support rate cuts but services data has been stronger and explains why the prices of services aren’t helping inflation tumble.

These words from Shane Oliver make a lot of sense and should be taken on board by investors who are either worried or too optimistic: “Easing inflation pressures, central banks cutting rates, China ramping up policy stimulus and prospects for stronger growth in 2025-26 should make for reasonable investment returns over the next 6-12 months. However, with a still high risk of recession, poor valuations and significant geopolitical risks particularly around the Middle East and Trump’s policies, the next 12 months are likely to be more constrained and rougher compared to 2023-24”.

That’s a fair call but I’m betting the positives will outweigh the negatives, making 2025 okay for playing stocks.

Switzer This Week

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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

This is CNBC’s take on what the Fed boss told the market this week: “The U.S. Federal Reserve doesn’t need to be “in a hurry to lower rates,” Fed Chair Jerome Powell said Thursday. The economy is still strong, Powell noted, and October’s disappointing jobs report was mostly because of hurricanes and labour strikes. Powell’s slightly hawkish tone dampened market enthusiasm and lowered traders’ expectations for a December rate cut.”

(The US stock market could pullback if there is no rate cut in December, though I’m sure Donald Trump will be arguing that the Fed should not be holding back on a once expected cut.)

 

Chart of the Week

This labour market chart makes an RBA rate cut in February less likely! That said, the focus will be on the CPI, which will the most important indicator for the RBA and when a rate cut happens.

 

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.