Switzer on Saturday

We copped an overdue sell-off that looks like an overreaction

Founder and Publisher of the Switzer Report
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What Fed boss Jerome Powell gives can be taken away and Wall Street didn’t like the power he yields. So, the key players that drive US stock markets weren’t keen about what he said this week. However, all was ‘forgiven’ on Friday when the Fed’s favourite inflation figure came in better than expected!

Before looking at the good news, let’s recap Powell’s

public observations that hit stocks hard after worrying markets:

  1. It looks like the four rate cuts that were expected for 2025 have now been trimmed back to two.
  2. According to Powell, the quarter-point cut this week that the Fed gave was a “closer call”, meaning there were doubters on the board, but the majority went for another cut.
  3. Powell said: “We have been moving sideways on 12-month inflation.”
  4. He also said: “You don’t rule things completely in or out in this world”. This has put a possible hike in rates back on the table.
  5. And he emphasised that future rate changes would be data dependent.

And data delivered overnight, with November’s personal consumption expenditure price index, the PCE, increasing 2.4% year-over-year, which was less than economists were forecasting. This meant that the Fed’s observations that drove stocks down this week was like the market’s sell-off i.e., possibly an overreaction.

Before the close, the Dow registered 10 down days, with CNN reporting it was “…the longest such stretch since Gerald Ford was president”. So, we’re talking 1974!

Ahead of the close, the Dow was up over 800 points (or 1.78%), but it had lost close to 5% before the PCE came to the stock market’s rescue. The other three closely watched indexes i.e., the S&P 500, the Nasdaq and the Russell 2000 were all up around 1.7%, which you seldom see mid-trading day.

It shouldn’t be a surprise to learn that according to the SPI Futures, our market will open 75 points higher on Monday. This could even be more if this market positivity rolls higher into the close. The good news is that this week’s losses are bound to be reversed and this whole incident shows what potentially will happen when the data drops here help the Reserve Bank to seriously consider and then cut rates.

On all scores, the PCE was good news for stock players:

  1. The PCE price index rose just 0.1% from October and a 2.4% annual rate, both below expectations.
  2. Core PCE, which excludes food and energy, increased 0.1% monthly and was 2.8% higher from a year ago. Both readings were 0.1% below the forecast.
  3. Personal income rose 0.3% and was 0.1% below the market’s estimate.
  4. Personal expenditures increased 0.4%. It too was 0.1% below the forecast.

You might recall that I’ve been arguing that a pullback or even a 10% correction couldn’t be ruled out, given the huge market rally, which for the US has seen the S&P 500 rise close to 24% over the past 12 months and 64% since this bull market kicked off in September 2022. That’s huge and leaves the US market exposed to anything that might derail the inflation fight or undermine economic growth, which means there’s a big watch on what President-elect Donald Trump might do as of January 20, which is Presidential Inauguration Day.

It seems intelligent to warn that 2025 and 2026 could be years of market overreaction. We here at The Switzer Report will try to prepare you and your portfolio for anything like that.

To the local story and the S&P/ASX200 lost 141.2 points (or 1.7%) on Friday to finish at 8168.2 points. All 11 industry sectors retreated on the worst trading day on the ASX since the start of September. The loss for the week was 229 points (or 2.76%). The Australian dollar slid to a two-year low and was valued at US62.21 cents! AMP’s chief economist Shane Oliver said all this was an “overreaction”. But this is to be expected, given stock markets are driven by short-term players. Those short-term market drivers will be buying on Monday.

To the stars and strugglers that gained or lost 5% plus for the week:

The Stars…

  1. Transurban gained 5.65% to $13.47.
  2. Pexa was up 5.79% to $12.98.

The Strugglers…

  1. Polynovo gave up 5.80% to $1.95.
  2. James Hardie lost 5.43% to $50.84.
  3. Coronado Global Resources copped a 14.82% drop to $0.73.
  4. The Star slipped 5% to $0.19.
  5. Emerald Resources dived 7.25% to $3.39.
  6. Nickel Industries fell 6.86% to $0.82.
  7. Data#3 lost 13.8% to $6.40.
  8. Karoon Energy depowered 6.83% to $1.30.
  9. Boss Energy weakened by 6.56% to $2.28.
  10. Liontown Resources went down the mine by 8.15% to $0.53.
  11. Newmont de-glittered by 6.53% to $59.22.
  12. Northern Star also lost its sheen, off 5.89% to $15.25, with the prospects of fewer US rate cuts not good for gold.
  13. CBA had a tough week, losing 5.17% to $150.26.
  14. Wesfarmers had a rare loss, off 6.20% to $69.56.

What I liked

  1. The PCE reading and the US market reaction.
  2. The Fed’s decision to cut official rates by 0.25% again, which makes it three cuts this year, with the September one a jumbo-sized 0.5%. (Note the Fed funds rate is between 4.25% and 4.50% and our cash rate is only 4.35%)
  3. The money market sees a 69% chance of a rate cut here in February.
  4. I liked the new members of the RBA board, especially Professor Renee Fry-McKibbon.
  5. Business conditions PMIs for December overall suggest global growth is okay and inflation is still falling – consistent with ongoing “Goldilocks” (not too hot but not too cold) conditions.
  6. The Bank of England left rates on hold as expected, reflecting sticky services inflation, but its commentary was dovish and will likely cut four times to 3.75% in 2025.

What I didn’t like

  1. The Fed telling Wall Street fewer rate cuts were coming, despite the fact the strong US economy had it coming!
  2. Chinese economic data was soft, highlighting the need for more stimulus.China and rate cuts here could make or break our stock market performance this year.
  3. The Government’s Mid-Year Economic and Fiscal outlook confirmed a return to deficit largely due to policy decisions to further boost spending, including childcare and $5.6 billion in election goodies under “decisions taken but yet to be announced’. While this year’s deficit is slightly less than projected in the May Budget, projected deficits are $22 billion higher out to 2027-28.
  4. Australian business conditions PMIs for December weakened slightly.
  5. Consumer confidence slipped in December.
  6. The Atlanta Fed’s GDPNow tracker for December quarter GDP growth running at 3.2% annualised, which was strong and could carry higher inflation with it.
  7. New Zealand is back in recession and the RBNZ could cut by a huge 0.75% at its next meeting and is likely to go below 3%.
  8. The Yanks are again talking about a partial shutdown of its public sector because of debt ceiling issues.
  9. UK inflation rose as expected to 2.6% over the year but services inflation was stuck at 5%, with wages growth remaining strong at 5.2%, partly explaining why the Bank of England remained on hold in the last week.

Could we see a Santa Claus Rally?

This better-than-expected PCE could recharge the market rally with Santa Claus Christmas magic. So, let’s get Shane Oliver’s historical check on Santa Claus rallies: “Out of interest the Santa rally normally kicks in around mid-December on the back of festive cheer and new year optimism, the investment of any bonuses, low volumes and no capital raisings at this time of year.

“Over the last 15 years, the period from mid-December to year end has seen an average gain of 0.5% in US shares, with shares up in this two-week period 10 years out of 15. In Australia, over the last 15 years the average gain over the last two weeks of December has been 1.1% with shares up 10 years out of 15. Of course, it’s not guaranteed and, so far, Santa looks to have been absent – or may have come early in November leaving markets overbought and now giving way to a focus on uncertainties around the impact of Trump’s policies and uncertainty about the Fed and RBA.”

Ultimately, data will decide the issue.

I hope you all have a great Christmas. We’ll be back on January 20. That said, if something wild or weird happens and I need to contact you, we could deliver a surprise New Year message. I’m a financial educator and messenger, and that’s my job!

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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.