Switzer on Saturday

Why is this Trump tailwind so strong?

Founder and Publisher of the Switzer Report
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Another post-Trump win for Wall Street but there has been a notable difference, with the real world winning over the unreal tech world. This development reinforces the rotation that has been gradually happening for US stocks and will inevitably come here in more force when interest rates start to fall.

Ahead of the close, all four most-watched market indexes were up but the Dow was 0.82% higher compared to the S&P 500 (+0.27%) and the Nasdaq (+0.11). This reinforces the message that big investors see value in those companies that are less tech-driven and more bread-and-butter stocks.

It reminds me of the old gold discovery days when most of the miners failed to get rich but those selling picks and shovels did!

Significantly, the fourth most-watched index i.e. the Russell 2000 (which captures US small cap companies) was up a big 1.68% and has been the real outperformer. This is the rotation play out of big tech into other companies, thanks to lower interest rates first, and now the Trump effect.

I’ve been recommending this strategy for the subscribers to my Switzer Report and for my financial planning clients. It’s early days because we don’t have rate cuts in sight yet. However, EX20 (which cuts out the top 20 stocks and gives you exposure to stocks numbered 21 to 200 in the ASX 200 Index) is up 6.6% over the past half year, but it would be more if rate cuts were close.

Over the same time, the Russell 2000 is up a whopping 15.44%, while the Nasdaq was up only 13% and the S&P 500 was up 12.44%.

These numbers show the rotation play in action and Trump’s promised ‘less regulation and lower taxes’ are seen as pluses for smaller companies that have also been hurt by 11 rate rises. The rate-cut phase the Yanks are now in is clearly a plus for these businesses and the Russell 2000.

One of the best trackers of what Wall Street is up to is Stan Stovall, chief investment strategist at CFRA Research. This is Stovall’s take on what we’ve seen this week: “Investors are rotating out of the previous highflyers of large-cap communication services and technology and into other cyclical sectors of consumer discretionary, industrials, and financials, as well as mid- and small-cap stocks. Drivers continue to be the traditional end-of-election-year rally, in which all sizes, styles, and sectors within the S&P 1500 rose in price,” he told CNBC.

When you add up Trump’s promises to rate cuts and good company earnings to no recession fears and AI, the result is a strong tailwind for stocks.

What can help or hinder this rally?

In the short term, the data drops this week in the US will be critical. The big focus will be on Wednesday’s PCE index, which the Fed sees as the best indicator of US inflation. A bigger-than-expected rise will hurt stocks as it will suggest rate cuts could be delayed. On the flipside, if the reading is good for inflation and there are no worrying recession signs from the economic growth figures (also out Wednesday and just before Thursday’s Thanksgiving), then this Trump updraft for stocks could keep happening.

In the longer term, Russia and the Middle East could be market hitters. Then what a President Trump tries on in 2025 with respect to tariffs could also be a rally rattler.

Here we get the October CPI on Wednesday, and the RBA Governor addresses the CEDA conference on Thursday. Both events will be watched very closely by the market and the media.

When we can believe a rate cut is close, our stocks will mimic many of the rotation plays we’re seeing on Wall Street right now.

To the local market, and you might not be a fan of Donald Trump’s politics, but you have to love his impact on stocks right now. The S&P/ASX 200 hit a record high on Friday, finishing up 1.3% for the week (or 140.80 points) to 8393.80. That’s been a 3.2% updraft because Americans opted for Donald Trump over Kamala Harris.

Sure, there have been other things going on but Trump and what he promises on deregulation and taxes has been a powerful tailwind.

At home, I can think of only one big issue that has helped our stocks go higher and that was President Joe Biden giving Ukraine access to long range missiles that raised fears of an escalation of the Ukraine-Russia war, which helped energy stocks.

Now let’s look at the stars and strugglers of the week.

The stars…

  1. Paladin put on 7.82% to $8.20.
  2. A2Milk at last creamed them, up 12.6% to $5.45 on a better outlook.
  3. Pinnacle Investment rose 9.96% to $23.30.
  4. Northern Star glittered up 12.16% to $17.90.
  5. Technology One did it again, up 14.15% to $30.49.

And the strugglers…

  1. Megaport lost 8.02% $7.57, despite a good update.
  2. Wisetech gave up 8.65% to $121.74.
  3. Pilbara Resources dropped 14.85% to $2.61.
  4. Neuren Pharmaceutical slumped 23.47% to $12.36.
  5. PEXA fell 7.75% to $12.50.
  6. IDP Education slipped 5.88% to $12.33.
  7. Liontown was off 7.78% to $0.77.

What I liked

  1. The rotation on US stock markets.
  2. US September quarter earnings is basically complete with 95% of companies having now reported results. 75.6% of S&P 500 companies beat expectations, basically in line with the norm of 76%.
  3. This from AMP’s Diana Mousina on the RBA board minutes: “The RBA meeting minutes for the Novembersaid that the board needed to remain forward-looking in its ability to adjust the future stance of monetary policy, and to avoid an “excessive reliance on backward-looking information” (which are indicators like the unemployment rate that has been persistently surprising to the downside, keeping the RBA hawkish). This would indicate that perhaps the RBA was closer to cutting rates than it appeared,if it was trying to be forward-looking and not wait as long for core inflation to be within in its target band”.
  4. The Westpac/Melbourne Institute leading index rose by 0.2% in October and has now moved into positive territory over a year ago for the first time since January 2023.This is in line with an expected slow improvement in economic activity in Australia and says we’ll probably avoid a recession, but it doesn’t help hopes for a rate cut.
  5. The Australian PMI data for November was soft – the manufacturing index improved to 49.4 (from 47.3) but services fell to 49.6 (from 51) with readings above 50 in “expansion” and readings below 50 in “contraction”. The fact the services sector is contracting should help inflation fall.
  6. The input and output price components of the PMI’s have been falling since their 2022 highs. Manufacturing prices continue to fall but services prices have stalled recently. Price indicators are still consistent with inflation lower than its current levels.

What I didn’t like

  1. US housing starts fell by 3.1% in October, but they were negatively affected by Hurricanes Helene and Milton, but building permits were down by 0.6%, so there are softer signs for the sector.
  2. We saw slightly higher inflation in Canada and the UK, which follows a similar story in the US. Sticky inflation could slow down the rate cut cycle, which wouldn’t be a plus for stocks.

Gold bugs will love this

The SMH reported the following on Tuesday: “Gold producers advanced after the price of bullion rose by the most since August as Goldman Sachs said prices would reach US$3,000 an ounce next year, with its analysts advising investors to ‘go for gold’. Gold is currently trading at a spot price of US$2,616.60 an ounce.”

 

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

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 

 

Quote of the Week

This from AMP’s Shane Oliver on investing in the Trump 2.0 era ahead:

  • The economic and financial environment today is more challenging than when Trump first took over in 2017: inflation is a bit higher; the budget deficit is worse; bond yields are higher; and shares are more expensive.
  • He also faces constraints from: rising bond yields; not wanting a sharp fall in shares; a razor thin House majority; and a political mandate to get the “cost of living” down and not up (with tariffs).
  • This could mean his more populist policies may ultimately be contained resulting in a better outlook for shares than many fear, albeit it will likely still be rough at times along the way and more constrained than we have seen over the last few years.

 

Chart of the Week

The Reserve Bank seemingly focuses on the CPI and inflation but purchasing managers and the PMI that tracks their buying shows a contracting economy, which should bring inflation down. Any number below 50 means contraction is happening.

 

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.