After the huge bounce back in shares since December 24 in the US, Wall Street has reached that level where profit-takers just couldn’t resist taking some gains off the table. But they’re not doing it with any enthusiasm because of two big market pluses out there.
The first is what the market could do when the US President inks a deal with Xi Jinping on trade. And secondly, even with weaker-than-expected economic data, market influencers will interpret any such development as a reason for the Fed not to raise interest rates.
As long as weaker-than-expected economic data isn’t pointing to a recession, then stocks can largely resist gravity. Overnight, these kinds of thoughts had to be driving what happened to stocks in New York. A 200-point gain out of the blocks was paired back after the manufacturing ISM grew at its slowest rate since November 2016. Then consumer sentiment, measured by the University of Michigan, disappointed, with a reading of 93.8 rather than the economists’ consensus forecast of 95.9. And again, it was the worst reading since November 2016!
“Friday’s report showed 25 percent of all consumers reported worsening finances, the highest proportion recorded since Donald Trump was elected president, according to the report,” Bloomberg revealed. However, the reason the market didn’t go too negative on these numbers is because they’re contrasted with other recent stats.
Bloomberg again: “The data contrast with other February sentiment readings that were more upbeat after the government shutdown ended and stocks rallied. The Conference Board confidence index jumped the most in three years, while the Bloomberg Consumer Comfort Index’s monthly expectations gauge rose the most since 2008.”
And during the week the conflicting run of data was again on show, with economic growth coming in at 2.6% rather than the 2.3% expected. This was a big drop from the third quarter’s 3.4% pace but economists expected a slower number because the impact of the Trump tax cuts are fading.
It’s worth noting that the US long-term growth rate is 1.7% to 2.2% and White House Council of Economic Advisers Chair, Kevin Hassett, remains bullish on the economy’s prospects.
“Every Q1 is about 1 percent below what you expect to have for the year,” he said. “We still are very, very confident that we are going to have a 3 percent year for 2019 and so what that means you should expect Q1 to be about 2 [percent],” he told FOXBusiness.
Also making many traders ponder profit-taking is the best start of year performance for stocks since 1991, with the S&P 500 up a huge 11%! And the Nasdaq is up 13.5%!
But trumping any potential negativity for stocks for the year is the fact that we’re in the best year in the presidential cycle – the third year – and note this killer fact: “Data compiled by LPL Financial show that in 25 of 27 occasions since 1950, the S&P 500 has posted gains in the final 10 months after rising in January and February,” CNBC’s Fred Imbert pointed out.
And with the S&P 500 at 2796 as I write, it’s worth telling you that the 2800-level has been a problem in the past. “We know how prominent the 2800 level has been, and it goes way beyond the last few days,” Frank Cappelleri, executive director at Instinet, wrote in a note. “In fact, this now is the 11th visit to the 2800 zone since the start of 2018.” (CNBC)
To the local story for the week and we hit a five-month high, with the S&P/ASX 200 index finishing up 25.4 points (or 0.4%) at 6192.7.
Individual news helped some specific stocks but, as my colleague Paul Rickard has argued for some time, the delivery of big dividends has helped stocks go higher. Shorten’s threat to franking credits and tax refunds for retirees has encouraged companies to pay big dividends. After all, what do investors do with dividend income? They buy more stocks, with term deposits and bonds not looking very attractive.
Bingo Industries went up 24.5%, on the ACCC giving it the greenlight to buy Dial-A-Dump. AfterPay said a Senate economics references committee report would not affect its business model and the market bought it, with the stock up 13.8% for the week! One analyst this week declared a target price of $28 for the company and it comes as the US revenue came in greater than expected.
All up, reporting season came in OK, without giving us great reasons to be optimistic. I think Gerry Harvey’s HVN report ‘kind of’ sums up what’s happening. His local sales and revenue was flat to a tad negative, if you look at franchise sales, but his overseas operations are going gangbusters, with 25% of his profit now coming from the likes of Malaysia, Singapore, Slovenia, Croatia, Ireland and New Zealand!
His stock has gone from $3.51 to $3.72 this week, and it’s not hard to work out why, with those overseas numbers colliding with an 8% plus dividend yield before franking! Not bad, with 9% of its stock shorted.
This rise in the market has been pretty good – up 13% since December 25 – and now we’ll have to see some good local economic data and some big help from overseas to see stocks go much higher with an election in May.
Wednesday’s GDP number will be really important for stock players’ confidence levels. In fact, the entire week will give us a good snapshot with retail, car sales, job ads, building approvals, GDP and the RBA rates’ meeting all giving us plenty of clues on what’s going on in the Oz economy.
What I liked
- New business investment (spending on buildings and equipment) rose by 2% in the December quarter to be up 1.9% over the year. Better still, the first estimate of spending in 2019/20 was $92.144 billion – that’s up 11% on the first estimate for 2018/19 and the strongest growth in seven years! Plans to invest by business are promising!
- The CoreLogic Home Value Index of national home prices fell by 0.7% in February to be down 6.3% over the year – the weakest annual growth rate in almost 10 years. Prices fell in all capital cities except Hobart (up 0.8%) and Adelaide (flat). Regional prices fell by just 0.3%. I know I shouldn’t like house price falls but they’re not as bad as doomsday merchants are predicting. Sydney is down only 10.4% for the year, while Melbourne is off 9.1%.
- The Australian Industry Group Australian Performance of Manufacturing Index rose by 1.5 points to 54 points in February.
- Private sector credit (effectively outstanding loans) rose by 0.2% in January, after a 0.2% rise in December. Annual credit growth fell to a near 5-year low of 4.3% in January but the fall is small and comes off record high levels. This is important.
- Total returns on national dwellings fell by 2.7% in the year to February – the worst growth rate in a decade – with houses down by 3.4% on a year earlier and units down by 0.9%. But these are small falls off record highs. Meanwhile, the S&P/ASX All Ordinaries Accumulation Index lifted by 6.6% over the year to February – the strongest annual growth rate since September!
- Donald Trump extending the deadline for a deal to kill a trade war between the US and China.
- The Chicago purchasing managers index rose from 56.7 to 64.7 in February (forecast 57).
- Federal Reserve chair Jerome Powell said that the Fed wasn’t planning to raise the inflation target but the Fed is close to agreeing to a plan for managing its balance sheet.
- The Dallas Fed manufacturing index rose from +1 to +13.1.
- The pound is saying that the UK will ‘do Brexit with a deal’ and I hope the Forex honkies are right!
- Copper prices spiked in February to the highest levels since December 2017. Historically, this metal has been a good predictor of world trade, which has stock market implications.
- China’s official services gauge fell from 54.7 to 54.3 (survey: 54.5 points). A level above 50 denotes expansion in activity.
What I didn’t like
- ANZ’s head of Australian economics, David Plank, who thinks next Wednesday’s GDP for December will be 0.2%! Gotta hope his calculator is malfunctioning!
- Construction work done fell by 3.1% in the December quarter, after a 3.6% fall in the September quarter. But these numbers are off high levels, with over the 12 months to December, construction work done was at record highs in NSW, Victoria, South Australia, Tasmania and the ACT!
- US housing starts fell by 11.2% to a 1.078 million annual pace in January (forecast 1.25 million) and the S&P/Case Shiller home price index fell by 0.2% in December to be up 4.2% over the year (forecast 4.5%). It was the slowest pace of home price growth in four years.
- The US-North Korea talks ended without agreement but you can’t expect much when Donald meets North Korea’s “Rocket Boy”.
- China’s official manufacturing purchasing managers’ index fell from 49.5 to 49.2 in January (forecast 49.5). A number under 50 means contraction.
Uber business ahead
Fact of the week for me was that recent data shows us that there were 2.3 million businesses in Australia at June 2018, up almost 75,000 businesses (or 3.4%) over the year. Over a third of the new businesses come from the Transport sector! Transport? The number of transport businesses has doubled in the past three years and you can blame the arrival of Uber and I guess those guys on Deliveroo bikes, who are self-employed contractors. This is the new face of uber-growing digital businesses ahead!
The Week in Review:
- Here are six picks [1] from some of the smartest stock players I know, who live and breathe shares 24/7!
- With company reporting season wrapping up this week, Paul Rickard put together a list of 5 stocks [2] that have stood out from an income perspective.
- James Dunn [3] looked at 4 very different examples of Australian biotechs pushing the knowledge envelope, with potentially very lucrative outcomes.
- I asked Julia Lee [4] from Bell Direct about how you can account for a company’s culture in a stock selection process.
- Is it time to buy former market darlings Netwealth Group and HUB24? Read Tony Featherstone’s analysis [5].
- Ardent Leisure was this week’s Hot Stock [6] from CMC Markets’ Chief Market Strategist, Michael McCarthy.
- For the Professional’s Pick [7], Jun Bei Liu, Portfolio Manager, Tribeca Investment Partners, explained why she likes Ansell
- The deluge in recommendation downgrades continued in the first edition of Buy, Hold, Sell – what the brokers say [8] this week as well as the second [9].
- And in Questions of the Week [10], we answered readers’ queries about Macquarie’s new hybrid, super contributions, whether NAB is too risky and political donations from your SMSF.
Top Stocks – how they fared:
What moved the market?
- Reporting season wrapped up with results overall better than what was originally feared.
- U.S. Trade Representative Robert Lighthizer told Congress that he is “not foolish enough to think that there’s going to be one negotiation that’s going to change all the practices of China or our relationship with them”. President Donald Trump and North Korean leader Kim Jong-un also failed to reach an agreement on sanctions and nuclear disarmament at a summit in Hanoi.
- The possibility of a Brexit delay is looking more likely with less than four weeks until March 29, the date Britain is currently scheduled to leave the EU.
Calls of the week:
- Julia Lee [4] said that Nine Entertainment Company (NEC), Link Administration Holdings (LNK) and Insurance Australia Group (IAG) should be on the radar of investors from an ESG (Environment, Social and Governance) perspective.
- Tony Featherstone [5] believes that now is not the time to buy former market darlings HUB24 and Netwealth.
The Week Ahead:
Australia
Monday March 4 – ANZ job advertisements (February)
Monday March 4 – Building approvals (January)
Monday March 4 – Business indicators (December quarter)
Tuesday March 5 – Balance of Payments (December quarter)
Tuesday March 5 – Government finance (December quarter)
Tuesday March 5 – New vehicle sales (February)
Tuesday March 5 – Reserve Bank Board meeting
Wednesday March 6 – Economic growth (December quarter)
Wednesday March 6 – Reserve Bank Governor speaks
Thursday March 7 – International trade (January)
Thursday March 7 – Retail trade (January)
Overseas
Monday March 4 – US Construction spending (December)
Tuesday March 5 – China Caixin Services index (February)
Tuesday March 5 – US ISM Non-manufacturing index (February)
Tuesday March 5 – US Monthly Federal Budget (January)
Wednesday March 6 – US ADP employment (February)
Wednesday March 6 – US International trade (December)
Wednesday March 6 – US Federal Reserve Beige book
Friday March 8 – US Employment (February)
Friday March 8 – China International trade (February)
Saturday March 9 – China Inflation (February)
Food for thought:
“The goal isn’t more money. The goal is living life on your terms.” – Chris Brogan
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 reporting season coming to a close, AMP Capital published a chart that shows the proportion of companies that have raised or lowered their dividends, or kept it flat, compared to the previous year:
Source: AMP Capital
Top 5 most clicked:
- The seriously special stock selectors with their seven secret shares! [1] – Peter Switzer
- 5 great income stocks from reporting season [2] – Paul Rickard
- 4 potentially lucrative biotechs for the patient investor [3] – James Dunn
- Buy, Hold, Sell – What the Brokers Say [8] – Rudi Filapek-Vandyck
- Is it time to buy these former market darlings? [5] – Tony Featherstone
Recent Switzer Reports:
Monday 25 February: Picks of the crop [11]
Thursday 28 February: Is it time to buy? [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.