Three hours out from the close, Wall Street was heading for its first negative trading session in six days and while the concern level wasn’t intense, for the first time since it started, the US Government shutdown was mentioned as a worry.
Right now, the closure of government services has dragged on for 21 days and will soon beat the record held by Bill Clinton’s administration from 1996!
It’s the length of this Democrat-Trump standoff over funding for the President’s Mexican wall that has caused this shutdown, which is now starting to affect stock analysts’ calculations.
“We think a deal will be reached to reopen the government, but only after economic, financial and/or political pain is felt,” Joseph Song, an economist at Bank of America Merrill Lynch, said in a note to clients. “Every two weeks of a shutdown trims 0.1pp from growth; additional drag is likely due to delays in spending and investment.” (CNBC)
Meanwhile, the usually very home-focused Yanks are starting to be a little nervous about the China slowdown, which ironically comes as better China trade deal news has been behind the five successive up-days for the New York Stock Exchange, which has been good for our stock market this week. More on that in a minute.
Powering the positivity this week was Jerome Powell, the Fed boss, who now has got his lines to the market right and the Trump China trade negotiators, who also have been making the right noises to the market.
Optimism about US-China trade talks plus the US Trade Representative’s office saying China has pledged to purchase “a substantial amount” of agricultural, energy and manufactured goods and services from the United States mid-week was well received, as was the news that the Chinese delegation will travel to Washington for more trade talks on January 22. The cream on the cake was a Trump tweet that said: “Talks with China are going very well!”
And the market liked this from Reuters, which reported: “Commerce Secretary Wilbur Ross said on Monday China and the United States were likely to reach a good settlement over immediate trade issues, while an agreement on structural trade issues and enforcement will be harder.”
This was both positive and realistic but added to the belief that there was real progress in the trade tussle.
Months ago I warned that the tariff fight and the Fed would make or break stocks and we’re seeing how the post-October US stocks sell off is unwinding, as we see these market headwinds abate.
Throw in the Fed minutes this week, which endorsed the central bank’s willingness to be patient on interest rate rises this year and a Mr Powell speech, where in a a wide-ranging question and answer session, he reiterated his “patience” commitment.
The market also liked his reference to there being no evidence of a broader economic slowdown in the published data.
This chart below shows how my predicted rebound has happened but I lacked the confidence of previous “buying opportunity” calls because Donald is so hard to call and I wasn’t so sure that Powell could so easily turn from hawkish to dovish, being a new guy in the game.
Source: S&P
With the Fed now supportive of the market and trade talks heading in the right direction, Wall Street will focus on the upcoming reporting season. And ahead of an important show-and-tell for US companies, General Motors surprised the market, reporting that its 2018 earnings beat expectations and this year, wait for it, “looks even better!” If that kind of talk comes out over the course of the reporting season, we’ll see a huge comeback for stocks.
On the local front, Friday blotted the copybook but four out of five days up was nice to see, though we largely had Wall Street’s positivity and a rising oil price to thank. Also a better-than-expected retail number helped those prone to negativity too easily (see the details in my “What I liked” below).
I have to say that I’m still surprised why a Kathmandu negative update was seen as a good indicator company for the sector!
Interestingly, Noni B came out with a good holiday sales story this week and its shares spiked, which I would’ve thought would have been a better guide for retail.
Costa Group shocked with a negative report that cost its share price 34%! This is one of the most loved stocks from experts but as someone whose father was a providore, who supplied the hospitality sector with fruit and veggies, I know how unpredictable this game is. (Dad died of a heart attack aged 52!)
And Hamish Douglas would have improved his relationship with his fans, with a report that Magellan’s performance fees would help his bottom line. The share price was up 15%.
And for those always asking Paul Rickard and myself about which bank we prefer, Goldman Sachs agrees with Paul, who has been an ANZ supporter since it reshaped its business and started killing costs. However, Goldman gave my preferred guess, NAB, an upgrade to “buy”.
What I liked
- Job vacancies rose by 1.3% to a record 241,600 in the three months to November. Vacancies are up by 13.9% on a year ago.
- Retail trade rose by 0.4% in November – the 10th increase in sales in the past 11 months. Annual spending growth, however, decelerated from 3.6% in October to 2.8% in November. In trend terms, spending was steady at 3.6% over the year to November – near 2½ year highs.Annual retail sales in the ACT and Queensland were at two-year highs.
- Over the year to November, seasonally adjusted growth of spending at supermarkets and grocery stores rose by 4.5% – the strongest growth rate in four years.
- The Australian Industry Group (AiG) Performance of Services Index (PSI) eased by 3 points to 52.1 points in December. The PSI has expanded for 22 consecutive months – the longest expansion since March 2008. PSI results above 50 points indicate expansion.
- The trade surplus decreased from a revised $2,013 million in October (previously $2,316 million) to $1,925 million in November (consensus: +$2,175m). It was the 11thsuccessive surplus in 2018. (Still a surplus is a good plus for growth.)
- Both Australia’s exports to China and Australia’s imports from China were at record highs in the year to November. China now accounts for a record 34.1% of Australian exports.
- ANZ job advertisements were flat in December but ads are still up by 4.1% over the year at 175,428 – just below 7-year highs of 178,879 ads.
- According to the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 3.4 cents last week to a 16-month low of 122.1 cents a litre. The annual fall in petrol prices to January 6 stands at 10.7% – the biggest decline in over two years.
- International scheduled passenger traffic through Australian airports increased to 3.55 million in October 2018 from 3.37 million in October 2017 – an increase of 5.3%. Passenger traffic for the year ended October 2018 was 41.319 million, up by 5.2% over the year.
- The CoreLogic Home Value Index of national home prices fell by 1.1% in December, to be down 4.8% over the year – the biggest annual fall in a decade. Home price growth started to slow from November 2016, around the same time that luxury vehicle sales started to soften. (As this is what the RBA wanted and given the falls are measured, you’d have to see this as a like rather than a dislike factor.)
- The World Bank projects global growth of 2.9% in 2019, down from 3% in 2018 and 3.1% in 2017. Growth of 2.8% is forecast in 2020 and 2021. (It’s down but still a good number.)
- The NFIB Business Optimism index in the US eased from 104.8 to 104.6 in December (forecast 103.6).
- The ISM services index in the US fell from 60.7 to 57.6 in December (forecast 59). But the new orders index lifted to a 6-month high and any number over 50 means expansion is happening.
- The AiGroup Performance of Manufacturing average wages index rose by 5.4 points to 64.2 points in December, above its historical average of 59.1 points.
- New mortgage applications in the US rose by 23.5% in the last week, after falling by 8.5% in the prior week and falling 5.8% in the preceding week. Refinance applications rose 35.3%, while applications to purchase a home increased by 16.5%.
What I didn’t like
- Talk that Germany could be on the brink of recession!
- The Performance of Construction Index (PCI) fell to 5½-year lows of 42.6 points in December, down 1.9 points from November. Construction activity has contracted for four successive months. A reading above 50 points indicates construction activity is generally expanding; below 50, activity is seen to be declining.
- The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.2% to 115.2. Still, the index remains above the average of 114.3 held since 2014 and is higher than the longer-term average of 113 since 1990.
- The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell by 1.8 points to 49.5 points in December – the first contraction (a reading below 50) in activity in over two years. In trend terms, the PMI fell by 1.3 points to 52.6 points.
- In seasonally adjusted terms, the apartments PCI sub-index fell 7.9 points to 21.7 points in December – the lowest level in seven years. Activity in the apartment sector has contracted for 10 successive months. House building activity is the weakest in 5½ years.
- US investors sold off retail stocks following weak earnings results from a number of retailers but especially Macy’s.
- Producer prices rose by 0.9% in the year to December (forecast: +1.6%), down from the 2.7% increase in the year to November and the slowest annual growth rate in 27 months. Consumer prices rose by 1.9% in the year to December (forecast: +2.1%), after lifting by 2.2% in November.
- The CommSec index of luxury marques peaked in the 2016 calendar year, with sales totalling 106,658 units. In 2017, luxury vehicle sales fell by 5.7% and sales fell by a further 8.9% in the calendar year 2018. There were 91,642 luxury vehicles sold in 2018 – a 3½-year low.
- Council approvals to build new homes fell by 9.1% in November, to be down by 32.8% over the year – the biggest annual decline in 9½ years. Rolling annual dwelling approvals in the ACT and Greater Hobart are at record highs.
Likes versus dislikes
I always promised you that I’d flag when the “What I like” started to be swamped by “What I don’t like”. Right now, the likes are still beating the dislikes but some of the likes are losing momentum and I can’t ignore this trend and will watch them carefully. Locally, it says the expected great 3.5% growth for 2019 will probably fall back to say a good 2.8% or so but this is guesswork. Growth could be better or worse than 2.8% but I can’t see 3.5%. Also spooking me is the ‘Germany close to recession’ story! “Industrial production fell by -1.9% in November – a year-on-year low of -4.6% – which has fuelled uncertainty in the world’s fourth largest economy,” said The Daily Mail overnight. But wait there’s more to think about – a recession in Germany could have a huge negative impact on the exposed and vulnerable Greek and Italian economies. Throw in the Brexit craziness and the global economy has a collection of challenges that we weren’t worrying about a year ago.
The Week in Review:
- I addressed the main question that needs answering [1]: is this another buying opportunity or is it time to run away?
- In his latest review of our model portfolios, Paul Rickard [2] wrote that the Australian share market held firm in December to finish almost unchanged despite the turmoil on Wall Street, and the model portfolios reflected this,
- Tony Featherstone [3] looked at whether the gold sector’s recent gains are a short-lived reaction to volatility in global equities or the start of a gold rush.
- While questioning whether the sell off is over or if it will spill over into 2019, these are the sectors Julia Lee [4] feels are likely to outperform along with her 7 favourite stocks.
- Bill Shorten’s proposed changes could lead some people to consider winding up their SMSF and putting their money elsewhere. Graeme Colley [5] explained how to wind up your SMSF.
- It won’t surprise you that I’m bullish on stocks, but what do other experts think [6]?
- In the first Buy, Hold, Sell – what the brokers say [7] of the week, analysts remained on leave but we updated any changes since the last Report on 17 December 2018, while in the second edition [8], upgrades outnumbered downgrades, with Domino’s Pizza one of the lucky ones to get an upgrade.
- For Stock of the Week [9], Shih Thin Wong, CIO & Portfolio Manager – Equities at Prime Value explained what he finds attractive about Amcor.
- And in Questions of the Week [10], we answered readers’ queries about share purchase plans, franking credits, bank capital notes and Which Bank?
Top Stocks – how they fared: 
What moved the market?
- The US and China met in Beijing this week to discuss the ongoing trade war, with President Donald Trump commenting on Twitter that “Talks with China are going very well!”
- The government shutdown in the US is set to extend beyond three weeks, with Fed Chairman Jerome Powell commenting that an extended shutdown “would show up in the data pretty clearly”.
- Oil prices have soured this week, with Brent crude and WTI crude both set to end the week more than 7% higher.
Calls of the week:
- Julia Lee [4] suggested that, for the time being, investors should avoid domestic exposure and remain cautious long term on banks.
- In his Stock of the Week pick, ST Wong [9] said that Amcor’s share price had fallen to attractive levels.
The Week Ahead:
Australia
Monday January 14 – Credit & debit card lending (November)
Tuesday January 15 – Weekly consumer confidence
Wednesday January 16 – Monthly consumer confidence (January)
Wednesday January 16 – Building activity (September quarter)
Thursday January 17 – Housing finance (November)
Friday January 18 – Tourist arrivals/departures (November)
Overseas
Monday January 14 – China International trade (December)
Monday January 14 – China Money supply & lending (December)
Tuesday January 15 – US Producer prices (December)
Tuesday January 15 – US Empire State index (January)
Wednesday January 16 – US Beige Book
Wednesday January 16 – China House prices (December)
Wednesday January 16 – US Retail sales (December)
Wednesday January 16 – US Export/import prices (December)
Thursday January 17 – US Housing starts (December)
Thursday January 17 – US Philadelphia Federal Reserve index (January)
Friday January 18 – US Industrial production (December)
Food for thought:
Cheers to a new year and another chance for us to get it right. – Oprah Winfrey
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:
As CommSec’s Craig James noted this week, changes in the “top-end” of markets such as luxury cars and houses “have tended to lead activity more broadly”:
Source: VFACTS, CoreLogic, CommSec
Top 5 most clicked:
- My 7 favourite stocks [4] – Julia Lee
- Is it time to buy or fly? [1] – Peter Switzer
- I’m bullish on stocks and I’m not alone [6] – Peter Switzer
- Buy, Hold, Sell – What the Brokers Say (Monday) [7] – Rudi Filapek-Vandyck
- Buy, Hold, Sell – What the Brokers Say (Thursday) [8] – Rudi Filapek-Vandyck
Recent Switzer Reports:
Monday 07 January: Happy New Year [11]
Thursday 10 January: Pockets of growth [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.