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Banks and Telstra pulling ASX down - so what stocks are a 'buy'?
By Peter Switzer
This sideways shuffle of the S&P/ASX 200 Index between 5800 and 5670 or so since April this year has meant our stock market has defiantly ignored the overall trend-lead from Wall Street.
The equivalent S&P 500 Index in the USA has gone from 2368 to 2537 over the April to now time period, which is a 7% rise.
Banks & Telstra pulling us down
Yep, we’ve ignored the nice rise into record territory and there have been reasons, such as the bank bashing post-Austrac’s revelations about the CBA, the Budget and even the SA Government has got into the act with a bank levy idea. Telstra has had to deal with its “what happens after the NBN?” problem and so the banks and Telstra have been like weights pulling down the index.
Also read: Immigrants will save Australia’s hot property markets
Going nowhere is understandable
If you throw in the high Aussie dollar and the fact that consumer confidence is low because of slow wage rises, I think the sideways shuffle is understandable. The fact that we haven’t sold off big time tells me the underlying story for stocks remains positive.
Turning the corner
Importantly, we are turning the corner, with the dollar slipping, Bell Potter upgrading CBA to a buy this week and even Morgans is now seeing Telstra as a buy!
The real fillip will come if US President Donald Trump gets his tax plan up as it will drive the US dollar up and ours down. It will help world economic growth as well.
This should be timed to perfection as our economy is showing more positive signs than it has for some time.
Look for the opportunities
That said, we could see a sell off in October because the Yanks might get buyer fatigue but it will be a buying opportunity.
But there are negatives…
That was my view on stocks before the US job numbers for August, which instead of being an 80,000 plus came in at a negative 33,000!
On first blush this could be a sign that the most important economy in the world was starting to wobble, however, the Dow Jones Index on Wall Street only dropped 1.72 points. So what really gives? Maybe the answer my friend, is blowing in the wind, or more correctly US hurricanes.
This was a big miss, with 80,000 jobs expected but in fact 33,000 were actually lost! As I said — that’s a big miss and is the first monthly job decline in seven years!
How hurricanes affect jobs
Despite this, the unemployment rate fell from 4.4% to 4.2%, which shows you how a big wind can hit participation rates and make jobless numbers look good. To explain how hurricanes kill jobs, check this out in the New York Times from Carl Tannenbaum, chief economist for Northern Trust: “The numbers were certainly blown around a lot by the storms. The interruptions created in the hurricane regions were seen in leisure and hospitality especially, which had a huge decline.”
Also read: This is how much Australia’s major banks will lend you
A negative becomes a positive
Wall Street will bank these numbers as not having long-term relevance and it could actually help stocks by delaying the Fed’s December rise. But Tannenbaum believes that the US central bank will be “looking past” these wind-blown numbers.
The good news
Apart from these job numbers, the overall US economic performance looks bright, with economic growth for the second quarter coming in at an annual rate of 3.1%.
Aussies on a diet!
Let’s go back home and the big disappointment of last week was the 0.6% slump in retail figures, which could prove roguish and one of the funniest quotes from an economist for the year to give ‘weight” to my argument. Bank of Melbourne economist, Janu Chan, looked at the big fall in food sales in places like cafes and wryly suggested that: “Apparently, Australians were dieting over August!”
We do spend on services
Our retail numbers now compete with the new age of ‘shopping’ experiences, such as massages, manicures, car washing, gym outlays and so on. A consumer’s budget is limited but a lot of Aussies now find dollars for services, while online sales and discounters, such as Zara and H&M, help keep shoppers shopping but if the volume is the same and the prices are falling, then guess what — retail numbers fall.
But if we’re still spending elsewhere on services, then it actually could be better for jobs because services actually need those outdated things called people!
Rate rise delayed?
Market experts think this retail number will push out the next rate rise, which should be good for stocks both from the ‘cost impact on consumers’ effect and the lower dollar impact.
Morgan Stanley thinks this to be the case and so is supportive of resource stocks going forward on the basis that “the global synchronized recovery is gaining traction…”
Stocks on the up
Our three-week losing streak ended last Friday after a nice day at the office for stocks but the biggest worry is that there was no clear reason for it. I’d like to think it was a lower dollar and a view that we have a stronger economy but that could be jumping to optimistic conclusions.
That said, I do think the dollar’s dive from 81 US cents a month ago to the current level of 77.77 US cents is encouraging our stock market but it’s hardly a big bang for the buck’s depreciation. Hopefully this currency slide is a ‘work in progress’ thing.
Also read: Global investors circle Australia’s $1.8 Trillion pension pot
Doing the sideways shuffle
The S&P/ASX 200 Index was up a nice 58 points last Friday, taking the gain for the week to 0.4% but we are still locked into that damn trading range of 5670 to 5800 or so. The best thing going for us is the fact that the December quarter is historically good for stocks and numerous fund managers think we should break out between now and when the Santa Claus rally comes to town.
Santa’s stocking his sleigh
Who will be Santa and what will he bring?
That’s easy. It will be Congress, and this mob needs a sack for Trump tax reforms. If this happens, then we’ll beat that trading range restriction. Recently, CommSec’s Craig James pointed out that: “US share markets rose for an eighth consecutive day to fresh record highs on US budget and tax reform optimism.” Good tax news is good for stocks.
I reckon as we close in on Christmas we will blow our sideways stock market shuffle blues away to wonderful sounds of jingle bells.
Go Santa Trump!
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds.
