FYI | Aug 03 2016
By Peter Switzer, Switzer Super Report
Here’s a news flash: Peter Switzer is becoming watchfully negative! I didn’t like the US economic growth numbers out on Friday and as I’ve always argued, like Bill Clinton did, “it’s the economy, stupid.”
Sure, individual companies can be counter-economic but when the overall stock market heads higher in a sustained way, there’s positive momentum out of the economy. Some companies rise ahead of it, based on the expectation of a better economy, while others benefit better than expected by economic developments so they spurt higher as the economy grows better than was predicted.
There are lots of economic reasons for stock prices going higher and the best way to prove the argument is to look at stock market indexes when recessions bring very bad economic news.
You can see the stock market slumps around 1975, 1982-3, 1990, 2001 (dotcom bust) and then 2008-9 with the GFC.
Recall that I’ve always said that we need quantitative easing to deliver economic growth or we’d be in for some trouble. Well, the Yanks got their latest second quarter growth number and it came in at 1.2%, when most of the respected economists were tipping a result such as 2.5%!
That’s a big miss. However, it wasn’t all bad news, with the US consumer seen as robust and two-thirds of American economic growth comes from the great Yankee shoppers but business investment was the huge disappointment. That can’t be something I can spin to the positive and if it doesn’t pick up over the next quarter, then I’ll become more negative.
Let’s look at the swag of negatives that are rattling me a bit at the moment:
- The disappointing US growth and business investment numbers.
- Future earnings would be downgraded if growth doesn’t pick up and stock prices will have to come down.
- The Fed will delay its next interest rate rise but eventually this ‘lower for longer’ rates story will wear thin.
- US stock markets are around all-time highs.
- If the next US jobs report disappoints, there could be a rush for the doors on Wall Street.
- The bond market again looks right with its low yields more correctly predicting a weaker than expected US economy.
- Brexit that required the promise of more central bank stimulus but few have actually done it yet because stock markets reacted positively to these promises that haven’t materialized!
- The IMF and the Bank of England are tipping a rough time for the UK economy post Brexit and the R-word for recession has been used.
- Europe’s bank stress tests weren’t great and an Italian referendum in October could be step one in Italy leaving the EU. If the current PM gets rolled in this vote, he has promised to resign, like the UK’s David Cameron and it would send shock waves through the world economy and stock markets.
- One bad China economic reading and, once again, the stock market’s exit doors could be well and truly tested.
- August is actually a shocker month for the Dow, which has been negative 45% of the time over the past 20 years and the average decline is 1.3%.
- Every data point over the next few weeks could be a trigger for a sell off and it’s more worrying because of the elevated levels of the Dow and the S&P 500 index.
- And then there’s the threat of Donald Trump!
Ironically, there are some smarties who say a Trump win would be so worrying that central banks would respond like they did to Brexit and that would help stock prices. However, if Trump wins in company with all of the worrying stuff I’ve listed above, then hedge fund managers and short-sellers would be in for a really great Christmas.
This week could be a huge test with manufacturing readings around the world, especially China and the US looking to be important gauges of how these economies are going. But the biggie is the US jobs report — if it’s a shocker and well under the 180,000 predicted, then stocks could nosedive.
Of course, I couldn’t end this piece without pointing to some positives and here they are:
- Evidence is continuing to build that US profits have bottomed. Three hundred and sixteen S&P 500 companies have now reported June quarter earnings to date and the results show an 8% plus pick-up in profits on the March quarter, with 81% beating on earnings and 58% beating on sales. (This is good news and if the economy was kicking in positively in the US, I wouldn’t have written this story today!)
- Shane Oliver said this on the weak US growth number: “June quarter GDP growth disappointed at just 1.2% annualized after just 0.8% in the March quarter. However, final demand growth was solid at 2.4% and the detraction from inventories (which was -1.2 percentage points) is likely to have largely run its course. (This says something good about demand but the overall result is still worrying.)
- Our economy continues to do OK and that weak US growth number that took our dollar up to 75.95 US cents could force the RBA to cut rates tomorrow and that could help our stock market.
Regrettably, the good news is being KO’d by bad news and it could lead to a bout of profit-taking on stock markets. Most of you must know how hard it is for me to write this but I always warned you when the facts change, my views will change.
I’m not in the “sell everything mode” but I suspect some stressful times could be ahead for buy and hold types. Provided economic data picks up, as I suspect could happen, there could be a buying opportunity ahead but I say all this with less confidence because of those damn US growth figures.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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