FYI | Jul 19 2017
By Peter Switzer, Switzer Super Report
Will August be great for stocks? Act now!
History says Wall Street could easily have a bad August, but, using the same argument, it’s highly likely that our stock market can fight the usual “follow the leader” syndrome. And I’d argue that local developments should be positive for stocks, with earnings season getting more thumbs up than thumbs down.
In fact, I haven’t had one commentator, fund manager or economist give me anything about stocks for earnings season that has made me cautious about the August reporting season.
The chart from AMP Capital’s Shane Oliver is the starting point for my optimism.
As you can see, July has been a good month for stocks, though some experts thought the changes to super rules that kicked in on July 1 could’ve meant that June could have been better than history generally predicts.
However, the month started at 5,724 and ended at 5,721, so if superannuants shoved money into their super funds, few rushed out instantly to buy stocks. Getting money in would’ve been the priority and allocating it would’ve been a secondary issue.
Over July, we’re up 0.7% but also note that the chart shows August is OK as well.
I’d argue that earnings season is set to be the defining moment for Aussie stocks, with a better-than-expected result likely to see our market take another shot at the 6,000 level on the ASX 200 Index.
Working in our favour to create some forward market momentum is the US reporting season. As I pointed out on Saturday, Thomson Reuters thinks second quarter earnings from S&P 500 companies are expected to increase 7.8% from a year ago. Clearly, if this proves too conservative, then Wall Street could give us a strong lead in to our reporting season.
And if we beat expectations as well, then we could be off to the races for stocks for the last quarter of 2017!
In the past, I’ve argued that the RBA and Treasury are in my corner on being positive about the Oz economy for the year ahead, with growth numbers around 3%. And if we can factor in more companies than not doing better than expected, then our stock market could start playing catch up with other equity markets of the world.
While I’m not happy about consumer sentiment here, with the Westpac/Melbourne Institute index of consumer confidence rising only by 0.4% to 96.6 in July and the confidence index down 3.3% on a year ago, strangely enough, consumers have been spending of late.
Against the sentiment figures is a surge in May of 706 million purchases made with credit and debit cards, up 16.3% on the year. It’s a result just exceeded by the Christmas-time sales in December last year. The purchases amounted to almost $51 billion, up 11% over the year!
This comes as retail sales have started to show signs of recovery. This is what CommSec’s Craig James concluded after retail numbers rose 0.6% in May, to be up 3.8% for the year.
“Back to back strength in retail activity!” he proclaimed. “Not only did retail sales record the biggest monthly gain in 2½ years in April, but activity levels have since gone on to lift by another 0.6% in May. And more importantly, the gains were spread out across an array of sectors and states. Even more encouraging, the spending was largely in discretionary sectors with non-food retailing rising by 1.9% over April and May – the strongest back-to-back gains in 2½-years.”
And as well, new motor vehicle sales totalled a record 134,171 in June, up 4.4% on a year ago.
So let’s assume the consumer is more helpful to the economy and company bottom lines than the consumer sentiment surveys suggest. And if we add in business survey positivity, then the case for earnings optimism isn’t too outlandish.
The NAB business conditions index rose from +10.9 points to a 9½-year high of +15.1 points in June. The business confidence index rose from +7.5 points to +9.3 points.
So as you can see, the overall economic settings are damn well better than OK. And if we add to the mix that we’re in confessions season and we’ve had few revelations of companies going public with bad news, it all makes me hopeful that we could get some good profits and outlook news in August.
One sector that has already shown that the market got ahead of itself is retail, with the Amazon anxiety shown for what it is — a potential threat but not a current one. Watching the retail profit results should be interesting and could easily add to the market momentum over August.
The chart above shows the USA stock market historically has a difficulty with September/October and November/December, but more than makes up in December. Given Wall Street ended in record territory again over the weekend, it could leave their indexes prone to some seasonal sell offs but I’m not expecting any cataclysmic market events that could lead to a re-run of the October 1987 crash and the GFC one of 2008.
And given that Donald Trump and his Republicans have to get a big positive play up and through the Congress before next year’s mid-term elections, we could easily see some market-helping stuff come out of the White House before year’s end. And by God, they need something and fast!
Late last week, Jamie Dimon, CEO of JPMorgan, put President Trump and his political buddies on notice, with a stinging appraisal of what Washington has been serving up. “It’s almost an embarrassment being an American citizen traveling around the world and listening to the stupid s— we have to deal with in this country,” Dimon was reported as saying, as an answer to an analyst’s question in a CNBC website story.
“Since the Great Recession, which is now eight years old, we’ve been growing at 1.5 to 2% in spite of stupidity and political gridlock, because the American business sector is powerful and strong,” he said. “What I’m saying is it would be much stronger growth had we made intelligent decisions and were there not gridlock.”
The pressure is on for something to happen in the US Congress. And if both US and our earnings seasons deliver on the high side, then we could be off to the races, even before November’s Melbourne Cup!
Placing your bets before reporting season could be the best speculative play but if you need to see the trend first of better-than-expected profits, then don’t procrastinate too long — it could prove costly.
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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