Stocks on Wall Street had a few positive starts this week, such as the action overnight but last hour negativity before Friday had set the market to be down for the week until surprise, surprise, US investors went positive before the close and they ended up positive.
That said, stock buyers in the States are still a little gun shy after the big sell-off recently.
I never wanted a quick rebound because it would have been a prelude to greater volatility. US stocks have comeback about 68% since the sell off and that’s good but it explains why the battle between stock buyers and sellers is now pretty even. Three weeks ago, it was sellers one, buyers nearly nil!
In contrast, our stock market did a good thing and had a positive week, nearly all week. I like it that the Americans seem more negative right now compared to us. It’s a good sign for our market for 2018.
The S&P/ASX 200 index rose 1.6% for the week and it came as reporting season ended up OK. The standout story was a2 – what a company it has proved to be – with its share price up around 37% for the week.
AMP Capital’s head of investment, Shane Oliver, has rated what he’s seen, with about 90% of top 200 companies having reported. And he called it “pretty good.”
The good stuff got down to the following:
- We’ve seen the highest proportion of Australian companies reporting profit gains since the GFC.
- Some 46% of companies have exceeded expectations against a norm of 44%.
- 73% of companies have seen profits rise from a year ago, compared to a norm of 65%, which is the strongest since the GFC.
- 66% have increased dividends from a year ago, with 27% keeping them flat, which is a sign of ongoing confidence in the outlook.
- 57% of companies have seen their share price outperform the market on the day results were released, against a norm of 54%.
Shock of the week was the performance of free-to-air TV companies’ stock prices. Seven West Media shares jumped 30.6% to 64 cents over the week, while Nine Entertainment climbed 27.8% to $2.07. Better bottom lines helped but speculation that media laws will be changed to help these businesses, threatened by the likes of Netflix and Apple TV, is a plus for their share prices.
I think they need help in this changing digital world but I’m not sure our obstructionist Senate will see it that way.
Lesson of the week was the result and share price action of Webjet. This company copped some headwinds last year after being a stellar performer for many reporting periods. This week its share price was up 23%, proving a good time to buy a quality company is when the market looks like its overreacted to a one-off piece of bad news.
In late October last year, a2’s share price dropped a dollar to $6.70 and it’s now an $11.77 stock! Don’t worry, I missed it too and I’m kicking myself.
By the way, Flight Centre has been a company that followed this playbook and this week one ‘expert’ admitted it screwed up. Fairfax says “Morgan Stanley upgraded the firm to equal-weight from underweight, setting out its reasons for doing so in a note titled ‘we were wrong.”
To the US action, and before the close, Wall Street was up over 200 points but seeing how it finishes will be important for guessing the market trend next week.
This is a tricky time, with the big sell off of a few weeks ago raising the confidence of pessimists and bears. There are always pretty convincing arguments for being very afraid of remaining long stocks but against these not bad arguments there are positives that aren’t easily ignored.
“We have a champagne problem,” said Nick Raich, CEO of The Earnings Scout on CNBC. “The economy is running too hot and that brings fear of higher rates. But that’s better than having to jump-start an economy that’s running cold.”
I loved this observation even more: “Earnings expectations are also rising for the first time in seven years,” he said. “That’s a big positive.”
Powering a lot of negativity is history watching, with previous patterns and warning signs alerting bear types. Now I’m not against watching the past, as you well know, but you do have to look for exceptional circumstances.
Tom Lee on CNBC showed why you need to be careful of history when the circumstances are special, say when it comes to rates on bonds, which started spooking the stock market recently. “Investors eye 3% on the 10Y [bond] with concern as it intersects a trend-line that has led to crashes/bear markets since 1980,” said Lee, founder and head of research at Fundstrat Global Advisors. “But, as we noted a few weeks ago, interest rates are moving higher from ultra-low levels and like 1950s-1960s, this period saw higher rates [and] higher equity prices.”
So here we have history trumping history and I have been long arguing that these very low interest rates add a new, “I’m not sure” factor into our guesses of where stocks are heading.
I also can’t forget the following from the Citi research team. “Good news on our checklist shows that only 3.5/18 factors are flashing SELL compared to 17.5/18 in 2000 [the dotcom crash] and 13/18 in 2007 [the GFC crash].” Citi strategists said. “So our bear market checklist says it is too early to call the end of this bull market.”
That 3.5 out of 18 from a market indicator that has a good historical record makes it easier for me to sleep at nights knowing I’m long on stocks.
We can’t help ourselves when it comes to history and yep, I know I’m guilty of selective history to justify my position but 3.5 out of 18 plus the strength of the global economy plus pending tax cuts in the US and possibly worldwide, on top of a huge infrastructure boom, all make me think this bull market has legs.
My main fear is how fast the Fed raises interest rates but these two quotes from the US central bank’s main players calm my nerves.
First, the St Louis Federal Reserve’s James Bullard warned against excessive rate hikes by central bankers this week, so that tells me someone like him knows about the potential danger of silly rate rises.
Any second, these minutes from the last Federal Reserve meeting showed that members were committed to ‘further gradual increases’.
The execution of US interest rate policy is the big watch for stocks in 2018 and 2019 and fortunately the Fed is not a central bank that ignores the business and consumers confidence effects on the economy that come out of Wall Street.
I remain of the view that stocks are heading up on a volatile trend line but if you’re a nervous type and can’t stand capital losses, you should think about your position.
What I liked
- The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 1.1% in trend terms in January, up from 1% in December and the fastest monthly growth in four years. The annual trend growth in sales lifted from 4.9% to 6.2% – the fastest growth in over two years and above the decade-average pace of 3.2%.
- This headline: “Wages growth lift off”, as the wage price index rose by 0.6% in the December quarter after a 0.5% rise in the September quarter. Annual wages growth lifted from 2% to 2.1% – the strongest annual growth rate in 18 months. Annual inflation remains below wages at 1.9% so real wages are rising.
- Average weekly ordinary time earnings (AWOTE) rose by 2.4% in the year to November. Female AWOTE rose by 3%, with male AWOTE up 2%. The ratio between female and male wages has lifted to the highest levels in 11½ years and women are bigger spenders, which should be good for the Oz economy!
- Assistant Governor Michele Bullock allayed concerns about household debt and mortgage stress. She highlighted that the “the overall level of stress among mortgaged households remains relatively low”.
- The leading index in the US rose by 1% in January (forecast +0.7%).
- The Markit manufacturing purchasing managers index rose from 55.5 to 55.9 in February (forecast 55.4). The services reading rose from 53.3 to 55.9 (forecast 54.0).
What I didn’t like
- The weekly ANZ/Roy Morgan consumer confidence rating fell by 3.5% last week. Sentiment towards household finances and the economy fell, despite a recovery in global stock markets and strong jobs data. However, the index remains above its long-term average of 112.9 and I prefer a few weeks before this index would concern me.
- The German business confidence index fell more than expected, while UK economic growth figures were revised lower.
One last like
These charts from Shane Oliver on reporting season:
These are all supportive of those who believe in stocks in 2018 but for those with a longer perspective, I’m doing a special story on Monday on the best stocks to hold for 10 years. I’ve surveyed some of the smartest fund managers in the country and some of their tips/selections will surprise a lot of you.
Don’t miss this event!
Tickets are now on sale for our Switzer Investor Strategy Day, where you’ll get to hear from some of Australia’s smartest investment managers. Click here to reserve your seats at this not-to-be-missed event! [1]
The Week in Review:
- Are banks a screaming buy or should you dump them? [2] It’s all about knowing your personal investment self and I answer this in my article this week.
- Is Telstra management off in fairyland when it comes to understanding how far it is from its goals? Paul Rickard [3] answers if Telstra is a buy… yet.
- The big guns reported [4] this week and James Dunn looked at the big companies like BHP, Wesfarmers and Woolworths ahead of their interim numbers.
- Just because a sector is considered defensive, doesn’t mean stocks in it are bullet-proof. Defensive is as defensive does, so are Bonds about to drag equities down again? Charlie Aitken [5]
- Tony Featherstone noted 7 standout stocks from earning season [6].
- Owning property in an SMSF can have some great advantages, but you need to have a contingency plan in case a member dies. Graeme Colley [7] identifies if property is a potential liquidity risk for SMSFs
- In the first Buy, Hold Sell – what the brokers say [8], brokers were busy as bees with upgrades for Origin Energy and REA group and there were upgrades for Fairfax Holdings and Domain [9] at the latter end of the week.
- Three fund managers shared their Hot Stocks [10] for the market downturn including Star, Tabcorp and Shopping Centres Australasia.
- Featured in this week’s Professionals Pick is a great value company at a rock bottom price. Find out what it is here! [11]
- Plus, Paul Rickard answers all of your Questions of the Week [12] around tax strategies.
Top Stocks – how they fared:
What moved the market?
- Company tax cuts are vital to ensure the long-awaited pick up in wages growth continues this year. New figures showed wages growth accelerated above 2% for the first time in 18 months raising hopes a long income recession is breaking.
- Big companies have reported better than expected this week as reporting season nears its end.
Calls of the week:
Tony Featherstone named 7 standout stocks from earning season.
Surprise, surprise – Harry Dent said a major crash is on its way. Watch the interview here [13]
I said that this year’s going to have plenty of “scary hip pocket moments!” [14]
Barnaby bowed to the inevitable and finally made the call to fall on his sword.
The Week Ahead:
Australia
- Wednesday February 28 – Private sector credit (January)
- Thursday March 1 – CoreLogic home prices (February)
- Thursday March 1 – Purchasing managers index (February)
- Thursday March 1 – Business investment (December quarter)
Overseas
- Monday February 26 – US New home sales (January)
- Tuesday February 27 – US Durable goods orders (January)
- Tuesday February 27 – US Home prices (December)
- Tuesday February 27 – US Consumer sentiment (February)
- Wednesday February 28 – Testimony by US Federal Reserve chair
- Wednesday February 28 – China Purchasing managers (February)
- Wednesday February 28 – US Economic growth (December quarter)
- Wednesday February 28 – US Pending home sales (January)
- Thursday March 1 – US ISM manufacturing (February)
- Thursday March 1 – US Personal income (February)
- Thursday March 1 – US Construction spending (January)
- Thursday March 1 – US New vehicle sales (February)
Food for thought:
“He who is not courageous enough to take risks will accomplish nothing in life.” – Muhammad Ali
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.
Charts of the week:
Source: Commsec
Source: Commsec
Top 5 most clicked:
- I [3]s Telstra a buy – yet? [3] – Paul Rickard
- Are banks a screaming buy or should you dump them? [2] – Peter Switzer
- 7 standout stocks from earning season [6] – Tony Featherstone
- Buy, Hold, Sell – what the brokers say [8] – Rudi Filapek-Vandyck
- Are Bonds about to drag equities down again? [5] – Charlie Aitken
Recent Switzer Super Reports:
Monday 19th February: Time for a rethink? [15]
Thursday 22nd February: Defensive is as defensive does [16]
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.