Before the close, the Dow was down but you can never be certain how the index will close because the White House seems to have an endless supply of curve balls that they throw nearly daily. Want proof? Read on.
Early today, the S&P 500 headed up on Donald Trump’s economic adviser, Larry Kudlow, telling us that if the trade talks progress well, the 90-day truce could be extended. Then some time later, Donald’s trade guy, Peter Navarro told CNN that the US could walk away if the trade issues aren’t sorted within the 90-day period and resume tariff hikes!
Did I say that there were too many curve balls from Donald’s team? And it forced someone like Marko Kolanovic of JPMorgan to put this note out this morning: “The risk that many market participants underestimated this year was the destabilizing impact of the US administration’s trade policies…” (CNBC)
Not only them but also me!
Kolanovic says these troubling trade issues created by the White House could have taken 10% off the S&P 500 and it’s not what we needed, with the Royal Commission killing the market love for the financial sector, which is worth 33% of the index.
Adding to the market’s date digestion dramas was a below-expectation jobs report that has been tagged a Goldilocks number because it helps the Fed do the rate rise pause that Jerome Powell implied recently, which the market rode higher on.
A Fed Governor Lael Brainard spoke overnight and admitted that the US economy is slowing but showed no fear that the R-word was relevant but she reinforced the idea that the Fed won’t raise rates too quickly and cause a recession.
To the jobs report and 155,000 jobs showed up in November rather than the 198,000 expected by economists. Unemployment stayed the same at 3.7% and wages rose by 0.2%, which was a little less than expected. This all screams to the Fed: don’t raise rates too fast!
The chart that plots future rate rises says there’s still a 78% chance of a rate rise this month from the Fed but it was 90% not long ago, however there are only two rises next year. The first is June and that’s only a 39% chance of happening! A few days ago, the first rate rise was going to be March and there was a 60% chance of it happening. This is a consequence of an economic downgrade of how strong the US economy will be next year, where growth will be good but not great. But that should take away the negatives that are hurting stocks today, such as the fear of higher mortgage interest rates and their negative impact on builders and their share prices.
And adding to the Goldilocks day, which should have been taking US stocks up today, was the agreement with OPEC and Russia to cut oil supplies, which saw the price of oil spike 5%.
Apart from the tricky trade talk out of the White House, all this news tells me that (at the moment) the key influencers of Wall Street aren’t in the mood for a crash. This remains a correction, where stock players just haven’t got enough good news stories to offset the uncertain stories that keep dogging stock prices.
Just look at Thursday night on the New York Stock Exchange. The Dow plunged over 700 points on the news that a prominent Chinese executive from Huawei was arrested in Canada to be extradited to the USA but the negativity evaporated when a Wall Street Journal story said the US central bank might slow up interest rate rises. This helped Asian stocks and our share market on Friday but I also think that a lot of smarties think our market is low enough.
One sign is the fact that 5600-5650 remains a solid support level that brings in buyers.
S&P/ASX 200
While we’re battling the impact of the Royal Commission and APRA on our bank share prices, the potential threat to the sector was seen on Friday, when IOOF shares dropped a huge 35.84%, after APRA proposed disqualifying five directors, including its CEO Chris Kelaher, following the latter’s performance at the Commission and some crimes and misdemeanours.
In case you weren’t counting, the S&P/ASX 200 Index closed the week, believe it or not, 14.3 points (or 0.3%) higher to stop at 5681.5! That was a pretty good effort, considering our growth number came in at 2.8% rather than 3.3% but in the world of GDP, it still was an OK result.
Interestingly, the lower-than-expected figure helped the dollar slide and that’s a help to our stock market.
It’s good to see that stocks I talked about on Monday on Money Talks and shared with you on Thursday had a great week.
Goodman Group was up 6.9%, Dexus was 5.8% higher and CSL put on 3.7%.
What I liked
- The recovery of the copper price and its link to global growth helped me shore up my optimism.
- Comments from the Fed boss, which basically said “I won’t slavishly raise interest rates.” His promise to play the economy in front of him helped Wall Street combat other reasons for being negative.
- The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 58.3 points to 51.3 in November. The sector has been expanding – an index above 50 points – for the longest period since 2005.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.8% to 119.5 to remain firmly above the longer term average of 113.
- The broadest measure of the trade accounts – the current account – improved in the September quarter (smaller deficit), with the deficit narrowing from $12.1 billion to $10.7 billion.
- Company operating profits rose by 1.9% in the September quarter to stand 13.5% up on the year.
- Approvals to build new homes fell a small 1.5% in October but I liked the fact that private house approvals rose by 2.7%. Home building is the best in around a decade in Hobart, so not all of Australia is Sydney and Melbourne!
- ANZ job advertisements fell by 0.3% in November but ads are still only 1.7% away from the 7-year high set in May.
- The lower Aussie dollar, which helps our stock market more than hinders it.
- The Australian Industry Group (AiG) Performance of Services Index (PSI) rose for a 21st consecutive month, rising by 4 points to 55.1 points in November – the longest expansion since March 2008. PSI results above 50 points indicate expansion, with higher numbers indicating stronger rates of growth.
- The CBA/Markit services sector gauge rose by 2 points to 53.7 in November.
- In the 12 months to November, car sales totalled 1,168,403 units, down only 1.4% on a year.
- The Australian economy grew by 0.3% in the September quarter, after growing 0.9% in the June quarter. Annual economic growth eased from 3.1% to 2.8% but it’s still a good number. I expect a rebound in the December quarter.
- The ISM manufacturing index in the US rose from 57.7 to 59.3 in November (forecast 57.6).
- The ISM services index in the US rose from 62.5 to 65.2 in November (forecast 62).
- The Challenger Report in the US showed that there were 53,100 job cuts in November, down from 75,600 in October.
- The Beige Book summary of economic conditions showed that most of the 12 US Federal Reserve districts reported that their economies expanded at a modest or moderate pace from mid-October through to late November. Wage growth “tended to the high side of a modest-to-moderate pace.”
What I didn’t like
- The dumb market assumption that the arrest of a Huawei executive has to mean bad news for the Trump trade war truce. Smarties running hedge funds are having a ball cashing in on the current negativity, which I reckon will be a thing of the past, if we can get a run of good news stories. I hope Donald starts contributing to them ASAP!
- The IBD/TIPP economic optimism index in the US fell from 56.4 to 52.3 in December (forecast 57.3).
- There were also concerns about the outlook for the US economy, given the flat yield curve and the suggestion that it was inverting, which can be a prelude to a recession. The hype about the inverted yield and its reliability in predicting a recession was more my concern. That said, the gap between long-term and short-term bond yields is the smallest in a decade but the bond market is not infallible. It predicted inflation in February and the stock market “went insane”, as CNN reported it.
- The CoreLogic Home Value Index of national home prices fell by 0.7% in the month to be down 4.1% over the year. Sydney prices fell 1.4%, with Melbourne down 1%. Prices rose most in Hobart (up 9.3%); Canberra (up 4%); Adelaide (up 1.4%); and Brisbane (up 0.3%). But prices fell in Sydney (down by 8.1%); Melbourne (down 5.8%), Perth (down 4.2%); and Darwin (down by 0.8%).
Will Donald Grinch Christmas?
Next week is crucial to set us up for a Santa Claus rally. This week, the market got a lot of what it wanted but US stocks are still down ahead of the close and me sending this Report out. The market saw the expectation of fast and too many interest rate rises taken off the table, less recession fear talk for 2019, a rise in oil prices with an OPEC-Russia agreement and a jobs number that reinforced the idea that the Fed won’t ruin the economy next year with too many rate rises. But we’re still down on the stock market and this shows us how important Donald, his team and their curve balls on trade are for stocks. Let’s hope they put those balls away this week and make it safe for Santa to visit Wall Street and then see the Christmas cheer spread to markets like ours.
The Week in Review:
- This week, I looked at how things could be about to change [1], and we might have Donald Trump, Xi Jinping and Bill Shorten to thank for it!
- I also tapped into the investing thoughts [2] of Lincoln Indicator’s Elio D’Amato, FNArena’s Rudi Filapek-Vandyck and Bell Direct’s Julia Lee
- Paul Rickard delivered the latest review of our income and growth portfolios [3] for the month of November.
- Although bearish on retail REITs, Tony Featherstone [4] said he likes Unibail-Rodamco, which is in value territory after recent price falls.
- Whether the real estate market is up or down or just treading water, the rules about what can and can’t be done in an SMSF continue to cause considerable confusion. Graeme Colley [5] hopes to clear up some of these misunderstandings in his latest article.
- In the first Buy, Hold, Sell – what the brokers say [6] of the week, there were 20 upgrades and 10 downgrades, with Aristocrat Leisure enjoying the largest positive adjustment to forecasts for the week. In the second edition [7], upgrades just outnumbered downgrades 7 to 6.
- For the Professional’s Pick [8] this week, Rob Miller, Portfolio Manager of NAOS Asset Management, explained why he’s backing Service Stream Ltd.
- Our two Hot Stocks [9] this week were BHP and Bluescope.
- And in Questions of the Week [10], we answered readers’ queries about capital losses in an SMSF, franking credits and if companies will bring forward distributions.
Top Stocks – how they fared:
What moved the market?
- After an initial positive reaction to the trade truce between Donald Trump and Xi Jinping, the stock market later sank due to uncertainty over the deal.
- The Fed is reportedly considering adopting a ‘wait-and-see’ approach for interest rate hikes.
- Australia’s GDP disappointed at 0.3% for the September quarter.
Calls of the week:
- Tony Featherstone [4] like Unibail-Rodamco, which is in value territory after recent price falls.
- Julia Lee’s selected Dexus as her favourite stock [2], and said it is set to benefit from rising rent prices in Sydney.
- Service Stream Ltd was the Professional’s Pick this week by Robert Miller [8], Portfolio Manager of NAOS Asset Management.
The Week Ahead:
Australia
Monday December 10 – Housing finance (October)
Monday December 10 – Reserve Bank Assistant Governor speech
Tuesday December 11 – Residential price indexes (September quarter)
Tuesday December 11 – NAB Business survey (November)
Wednesday December 12 – Consumer confidence (December)
Wednesday December 12 – Lending finance (October)
Thursday December 13 – Finance & wealth (September quarter)
Friday December 14 – ‘Flash’ CBA purchasing managers’ indexes (December)
Overseas
Sunday December 9 – China consumer and producer prices (November)
Monday December 10 – US JOLTs Job Openings (October)
Tuesday December 11 – US Producer prices (November)
Tuesday December 11 – US NFIB Business Optimism (November)
Tuesday December 11 – UK Parliamentary vote on Brexit
Wednesday December 12 – US Consumer prices (November)
Wednesday December 12 – US Monthly Budget statement (November)
Friday December 14 – China activity data (November)
Friday December 14 – US Retail sales (November)
Friday December 14 – ‘Flash’ Markit purchasing managers’ indexes (December)
Friday December 14 – US Industrial production (November)
Saturday December 15 – China House prices (November)
Switzer Stumper
What is the difference between the Christmas alphabet and the regular alphabet?
Email subscriber@switzer.com.au with the correct answer for your chance to win an extra month on your subscription!
The answers to last week’s question was: True
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:
With the release of the national accounts earlier this week, Australia has continued its record economic expansion with 0.3% growth in the September quarter. This chart from CommSec tracks economic growth over the past 28 years:
Source: ABS, CommSec
Top 5 most clicked:
- Are things looking up? [1] – Peter Switzer
- 3 experts give their favourite stocks [2] – Peter Switzer
- Buy, Hold, Sell – What the Brokers Say [6] – Rudi Filapek-Vandyck
- Portfolios outperform in a soft market [3] – Paul Rickard
- Hot Stocks – BHP and Bluescope [9] – Maureen Jordan
Recent Switzer Reports:
Monday 3 December: Positive moves [11]
Thursday 6 December: Expert stock tips [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.