Switzer on Saturday

If Santa can’t rally on this, he’s too hard to please

Founder and Publisher of the Switzer Report
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Friday Close
Change
Change %
Week Change %
Dow Jones
28,455.09
78.13
0.28%
1.14%
S&P 500
3,221.22
15.85
0.49%
1.65%
NASDAQ
8,924.95
37.74
0.42%
2.18%
ASX 200
6,816.30
-16.80
-0.25%
1.14%
Data for week commencing 16 December 2019

A Trump tweet kept Wall Street heading higher into record territory, with the US President telling us about his “very good talk” with the Chinese President, Xi Jinping. Mr Trump also made the deal look more believable with his: “Formal signing being arranged.”

And Xi kept the positive vibes going with the following: “The first-phase economic and trade agreement reached between the U.S. and China is a good thing for the U.S., China, and the entire world… Both the U.S. and Chinese markets and the world have responded very positively to this. The U.S. is willing to maintain close communication with China and strive to sign and implement it as soon as possible.”

The ‘bromance’ Donald has often implied about Xi and himself looked alive and believable and if this doesn’t keep the Santa Claus rally coming, nothing will.

Adding to the good story out of the States overnight was the third quarter consumer spending number, which was upgraded from a 2.9% rise to 3.2%.

And here’s a great take on the fact that not only is a looming trade deal a plus for stocks via the certainty it gives companies and leading to business investment, growth, profits and better share prices but the geopolitical fears are tailing off.

“You’re seeing the geopolitical risk that was in the market seep out now,” said Brent Schutte, chief investment strategist for Northwestern Mutual Wealth Management to CNBC. “You had the Fed backstopping risk throughout the year but you had those geopolitical worries. Now, they’re abating and the market is moving higher.”

Those of you worrying that such a good year in both the US and Australia for stocks must make another good year really hard to believe will happen, should see this historical work on US share movements from Nordea Research.

On the past 18 occasions that the S&P 500 Index has topped 25% in any one year, the following year’s performance has been positive 12 times. That’s a 66% chance of a good year in 2020 and the fourth-year of a US Presidency is historically the second best after the third year, which we’re in now.

To the local story this week and the S&P/ASX 200 Index had a Santa-powered week, up a tick over 76 points for the week, or 1.1% higher. And given our mixed economic story that wasn’t a bad effort.

Generally, our run of economic data is disappointing, apart from the jobs story, with 39,900 positions created in November, bringing the jobless rate down from 5.3% to 5.2%. But the better number was the fact that we have created nearly 255,000 jobs in the year to November, with 62.8% of those jobs going to females!

Unemployment in the country’s biggest states of NSW and Victoria was a low 4.7% and 4.6% respectively. When you add this to the rising house price scenario, you do have some reason to try to think positively about the economy in 2020. In fact, some of the slight negativity for our market late in the week was driven by some market guessers thinking those job numbers could derail the highly-expected interest rate cut in February.

The run of data from here to the end of January will be scrutinized very carefully by the RBA, Treasury and the stock market influencers out there.

And amidst the positivity for stocks following the trade deal’s imminent signing, Saxo Bank’s Eleanor Creagh, reminded us of a negative that is no longer weighing on stock prices. “Green shoots are now firmly in focus as investors reprice the fears of the yield curve inversion earlier this year and an impending recession,” she told the AFR.

Remember the fear that the media and some market ‘experts’ drummed up about the inverted yield curve? I hope you recall how I gave that so-called reliable predictor of doom some historical relevance, which largely showed it wasn’t reliable at all!

It’s been an up-week for many of our big names, with CSL up 1.5% and now at $282.16, which is a kick in the guts for those who stopped being a believer when it was a hundred dollars lower!

CBA put on 1.6%, Telstra 0.3%, Wesfarmers 1.7% and Macquarie added 3.1% to finish at $140.50.

As we all know, the banks faced more charges of conduct unbecoming, so it was no surprise to see NAB down 1% to $24.89 and Westpac off 0.5% to $24.36. Both banks will be led by new CEOs and Chairmen in 2020 and if our economy picks up with rate cuts done and dusted, these two companies could prove OK plays.

What I liked

  • The job numbers – 39,900 jobs in November and unemployment down 5.3% to 5.2%
  • Australia’s population expanded by 381,600 people over the year to June 2019 to 25,364,300. Overall, Australia’s annual population growth rate fell from 1.57% to 1.53% – the slowest pace in three years but it’s still a good growth rate.
  • The value of total new home loan commitments to households (excluding refinancing) rose by 2% in October to be up by 0.9% on a year ago – the strongest annual growth rate in two years. Lending to owner‑occupiers rose by 2.2%, while lending to investors was up by 1.4%.
  • US housing starts rose by 3.2% (forecast: +2.4%) to 1.365 million units in November. Building permits rose by 1.4% (forecast: -3.5%) to 1.482 million units in November. Permits for future home construction lifted to a 12½-year high. Industrial production rose by 1.1% (forecast: +0.8%) in November.
  • Fixed-asset investment in China rose by 5.2% in the 11 months to November on a year earlier (consensus: 5.2%), unchanged from the 5.2% lift recorded over the 10 months to October. Industrial production rose at a 6.2% annual rate in November (consensus: 5%). Production had risen by 4.7% in the year to October. Retail sales rose at an 8% annual rate in the year to November (consensus: 7.6%), up from the 7.2% annual rate in the year to October. Global stock markets saw this run of data as upbeat and it could not come at a better time with a trade deal signing looming.

What I didn’t like

  • The impeachment sideshow in the US but to date stocks are ignoring it all.
  • In trend terms, the Internet Vacancy Index decreased by 1.3% (or 2,200 advertised jobs) in November – the biggest fall in seven months and the 11thsuccessive monthly fall. The index is 10.6% lower than a year ago – the biggest annual decline in six years, but the index is still 5.9% above the level recorded five years ago.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.9% to 108 points – the lowest pre-Christmas reading since December 21, 2008. Sentiment remains below both the average of 114.3 points held since 2014 and longer-term average of 113.1 points since 1990.
  • The CBA/IHS Markit ‘flash’ purchasing manager survey for manufacturing fell from 49.9 points in November to a 3½-year low of 49.4 points in December. The services index fell from 49.7 points to 49.5 points in December. Any reading below 50 indicates a contraction of activity.
  • According to CommBank Chief Economist Michael Blythe: “The monthly CBA Household Spending Intentions series, data to end-November, shows a very modest response to the policy stimulus, both monetary and fiscal, that has been applied to the economy through 2019. The weakness in the HSI indicators is centred on spending on ‘goods’, which continues to track sideways at low levels. In contrast, spending on ‘experiences’ is generally trending higher”.
  • The ‘flash’ IHS Markit purchasing managers’ indexes (PMIs) in the US were issued with the manufacturing index down by 0.1 point to 2-month lows of 52.5 points (forecast: 52.6 points) in December but the sector is still expanding. Any number over 50 tells us that. The services PMI rose by 0.6 points to a 5-month high of 52.2 points (forecast: 52 points) in December. The NAHB housing market index rose by 5 points to a 20-year high of 76 points (forecast: 70 points) in December. The New York Empire State manufacturing index rose by 0.6 points to 3.5 points (forecast: 4 points) in December.

Thanks for the memories

2019 is done and dusted from my Switzer Report point of view. I think we’ve got the big calls on the market right, with the S&P/ASX 200 Index up 23% before dividends and franking, while we had a lot of pretty memorable stock calls over the course of the year.

I hope you and your loved ones have a wonderful Christmas/break and I look forward to continuing our working relationship on building your wealth in 2020.

The week in review:

On our YouTube channel this week:

Food for thought: 

“In suggesting gifts: Money is appropriate, and one size fits all.” – William Randolph Hearst

Chart of the week:

33% of fund managers surveyed by Bank of America Merrill Lynch this month identified the trade war as the biggest ‘tail risk’, down from 38% in November:

 

Top 5 most clicked:

Recent Switzer Reports:

Monday 16 December: My investment strategy for 2020

Thursday 19 December: Why I love Disney

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.