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When Donald met Kim
By Peter Switzer
No one should be surprised that I’m hoping that our stock market some time this year will get a wriggle on and start playing catch up with the likes of Wall Street, where the share market indexes were in record territory until Donald met Kim!
Down, down, prices are down
This week of “fire and fury” talk has troubled Wall Street and taken the Dow Jones Index down 204 points or 0.93% on Thursday. The S&P 500 lost 1.45% and the Nasdaq dropped 2.13%.
What Donald said…
This USA-North Korea blue just got serious and what turned a getting-hotter dispute into a white-hot situation was Mr. Trump’s gold club chat to reporters where he said of his fire and fury threat that: “If anything, maybe that statement wasn’t tough enough.”
Unless some real diplomacy is introduced, the stock market will follow through with a significant pullback that a lot of commentators have thought was overdue.
Also read: CommBank chief to step down
Donald’s kimchi’d the market
For those who may not know, kimchi is a Korean pickle, and Donald’s in a real pickle currently. It’s like he’s trumped the stock market he initially helped take higher after his acceptance speech, following his election win in November last year. So, this makes our stock market catch up play even harder to pull off this year.
Slip sliding away
While US markets have been in breaking record highs, we have been stuck below the 6000-level for an interminable amount of time. Our record high, achieved before the GFC in November 2007, was 6828.70. It’s now at 5760. As you can see, we’re 1068 points away from that benchmark.
We nearly cracked the first milestone towards our record high — the 6000 level — in March 2015, but like that old Max Merritt & the Meteors’ song, we had to endure the Index high “slipping away”.
We’re stuck
Then on May 2 this year, we threatened the seemingly unreachable 6000, only to see the market sell-off. We’ve been stuck in a trading range of 5800 down to 5670 and you feel something has to give, though I’ve liked the big influencers of the market not being mad keen to sell off excessively. It’s like they’re saying: “We can’t be exuberant but we also can’t get too pessimistic.”
What do we need here?
What needs to happen to give us a chance of seeing the 6000 level first and, eventually, the 6828 plus day when we can scream that: “It’s a record high for Aussie stocks!”? In a nutshell, we need the two E’s to excite those who give up cash for stocks — earnings and economic data.
We’re in earnings season right now, and the first week was underwhelming, and apart from the CBA’s good profit showing, which makes us more positive towards the other banks, I’m not over-excited about company reports so far.
In fact, one company reported a record profit and great revenue numbers but when Anthony Scali, the CEO of Nick Scali, mentioned concerns about a housing slowdown, the market took his share price down 8%!
Get things going
This is a very pro-negativity stock market right now. So, what do we need to see happen to see our market to beat the 6000 level and then march past 6828?
Try these ‘little’ milestones
I’ll try and get them in order:
The US economy grows better than expected and last Friday’s jobs report suggests this will happen.
Donald Trump gets his act together and his tax plan is good enough to be accepted by Congress.
The US Fed raises interest rates.
The above would then take our dollar down, as a 79 US cents Oz dollar doesn’t help our economic growth and some of our best companies that earn export income overseas, of course.
Our economic growth rate starts to head towards 3% plus, while at the moment we’re more around 2.5% or so.
China remains strong and demanding our resources to help both growth and the miners’ share prices.
The Coalition actually works together as a team to help raise confidence levels in Canberra and, in turn, the economy.
Easy peasy
If most of this happens along with the continuance of the improvement of economic growth in both Europe and Japan, then taking out the 6000 level will be a doddle.
What’s needed next?
We then need to see the global economy power up to higher growth rates, which would push interest rates and wages higher and our economy would start looking like a pre-GFC normal economy.
That bit is going to be harder and we might have to wait two years or so for it to happen. Right now, most economists think interest rates won’t rise here until mid-to-late 2018. Dr Frank Gelber of BIS Oxford Economics thinks it will be 2020!
If we see it sooner, we might also see those stock market benchmarks sooner rather than later.
Donald’s dragging the chain
Our economy looks like it’s trying to do its bit with the NAB business conditions reading at a near 10-year high but Donald looks like he’s still dragging the chain.
Trump these!
Here are some recent, Trump-unhelpful headlines from CNBC:
Special Counsel Robert Mueller impanelled a grand jury in his investigation into Russia’s involvement in the U.S. election!
Trump is signaling he’s about to lash out at China!
Trump may be about to wallop global trade as we know it, but markets don’t seem to understand!
Trump berates Congress again — this time over Russia relations!
And on Friday we got: “Trump: Maybe ‘fire and fury’ statement on North Korea wasn’t tough enough!”
The exclamation marks are mine and demonstrate my frustration with Donald because we need him to play a different and more politically successful game.
We’re over the sizzle
Undoubtedly, some of the 14% improvement in overall stock market returns last year in Australia were linked to the arrival of President Trump but that was the sizzle. He needs to deliver not only his economic reform agenda but he has to prove to Wall Street that he is a safe pair of hands when it comes to political hot potatoes like Kim Jong-un.
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds.
