FYI | May 29 2019
By Peter Switzer, Switzer Super Report
Five obstacles to economic growth and stock market gains are down but we have one to go and yes, it’s Donald Trump. If we can get over this hump — the Trump hump — maybe that breakout for stocks predicted by CMC’s Michael McCarthy will come to pass.
Those 5 barriers to taking stocks higher were:
- The Fed wanting to raise rates.
- APRA and its determination to reduce bank lending.
- The Royal Commission and its smashing of bank’s profitability via the cost of remedies and the killing off of lines of revenue, such as financial planning.
- The negative vibe an election always brings to business spending and hiring, as well consumer outlays.
- The threat of Labor’s Bill Shorten, with his policies that threatened small business with wage rises, property investors who faced negative gearing changes and investors generally who were facing a halving of the capital gains tax discount.
I did tell you I expected a Bill win and a short-term boom as investors chased property and stocks before January 1 (the proposed start date for these policies) — but I feared the cliff that investments could’ve fallen over after day one of 2020.
This chart of business confidence slipping shows my point graphically:
Over the same time period, the Westpac consumer confidence reading went from a reading of 106.1 in July 2018, which was the best reading since last 2013 after Tony Abbott became PM and was the number when Malcolm Turnbull copped his dismissal notice!
I expect the Coalition win and the end of election curve balls will help a resurgence in consumer confidence. And given the fact that tax cuts are coming and rate cuts are expected, this should add to an improving economy that should help sales, investment, growth, jobs, profits and stock prices.
Adding positive fuel to the fire is a lower Oz dollar. The forex team at Citi thought a 63 US cents was coming but maybe a Coalition election win might make them a little less bearish on how much the dollar depreciates. On the other hand, Westpac’s Bill Evans thinks we’ll see three rate cuts this year in June, August and now Cup Day, which, if right, will take our dollar down.
And if you want more positive local news to underpin profits and stock prices, note that APRA is easing up on its tough lending edicts.
“The Australian Prudential Regulation Authority (APRA) has flagged lowering the minimum interest rate serviceability buffer from 7 per cent to a level determined by banks and other lenders,” the ABC website reports. “For the past four-and-a-half years, APRA has required banks to test prospective borrowers against the higher of either an interest rate of 7 per cent, or a 2 per cent ‘buffer’ over the loan’s actual interest rate, to ensure they could meet repayments if rates rise.”
In fact, APRA asked banks to be above this level for safety so many banks worked out whether customers could repay a loan based on a future rate of 7.25%! Given average loans are around 4%, that was crazy and has been hurting economic growth, bank profits and stock prices.
However, the election results changed that, as we saw last week with Westpac up 10.7% for the week, while the other Big 4 put on around 7%. This was a flagging that the market believed bank persecution would be a lot less under ScoMo compared to a Bill Shorten regime.
Making me even more relaxed about my reserved optimism for stocks this year is work undertaken by Market Timing, which we put out in conjunction with Percy Allan, the former Secretary of the NSW Treasury and Chairman of the NSW Treasury Corporation between 1985 and 1994.
“The Australian All Ordinaries share-price index’s medium-term (red) trend-line is well above its long term (blue) trend-line and rising,” Percy points out. “Its long-term (green/black) momentum gauge is positive and rising gradually.”
So the ducks are in a nice row for Michael McCarthy’s “breakout” for the S&P/ASX 200 Index.
But what’s a breakout?
“A breakout is when prices pass through and stay through an area of support or resistance,” Wikipedia tells us. “On the technical analysis chart a break out occurs when price of a stock or commodity exits an area pattern.”
If Donald can nail this infernal trade agreement with China, then we will have beaten the final obstacle to us taking out our all-time high on the S&P/ASX 200 Index of 6873.20 (which was attained on 31 October 2007, which ushered in the GFC!).
So the question is: can (and will) Donald pull it off?
Last week, when it looked like the market was stressing out about the little likelihood of a deal soon, Trump tweeted that a trade deal could come more quickly than we think.
Last week, the RBA Governor showed concern that a trade war would lower global growth. I can’t believe Trump sees that in his interest or the USA’s.
I’m going to gamble on Donald pulling off a trade deal and that should push us through our all-time high sometime this year.
I told you on Saturday that I had breakfast with a New York hedge fund manager who said both Main Street and Wall Street sided with Donald on his battle with China. He also said his team was investing and not expecting a recession this year or next.
I guess it’s why the equity team at the well-established US investment bank, Piper Jaffray, has such a positive view on Amazon. “We believe AMZN shares will reach $3,000 by sometime between mid-’21 and mid-’22 or within 24-36 months,” said one of its analysts, Michael Olson in a note. “We have a high degree of confidence that AMZN shares can reach this level with no major acquisitions or other significant changes to the business.” (CNBC)
That’s not going to happen if we see a US recession between now and 2022. Gee, I hope these guys are right!
Go the US economy!
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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