05 Jun Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +1.8% |
| Nasdaq | +1.7% |
| Aussie All Ords | -0.0% |
The debt-ceiling debacle is now over. They voted 314-117 to approve it. No surprise. What was a surprise to me is how much ground the Republicans gave. They were spouting on about responsible borrowing and managing expenditures with income, but in the end, it looks like they caved and allowed the Democrats to spend with little thought of the future.
Sounds inflationary to me.
But the market seems to have moved past the inflation story and it is no longer reacting to worrying signs. Which is exactly what happens in a Bull market.
On Friday the monthly employment numbers were released. The US added 339,000 jobs in May and Average Hourly earnings are up +4.3% on last year.
More people with jobs and each person earning more means more spending which means more inflation. Yet the market jumped 1.5% on the news.
Why?
Because this also means no near-term recession. You can’t have a recession when you have full employment. Or if you do technically have negative growth for two quarters, no one cares because they have a paycheck arriving next week.
I’ve long argued there will be no recession based on employment and it seems there will be no uptick in unemployment because productivity is so low. This is because so many people are working from home and by working I mean doing about half a day and then playing with the kids or walking the dog. So companies need twice as many employees to do the same amount.
Maybe if ever they can get employees back in the office they will learn how to increase productivity and cut the workforce. But until then we will be stuck with high inflation and high interest rates.
Neither of which seems to bother the market anymore.
In fact, in some markets, this environment is positive for stocks. Japanese stocks are on a run because high inflation is causing investors to chase higher returns. Hiromi Yamaji, president of the JPX group that controls the Tokyo and Osaka exchanges, said he expected many Japanese to stop sitting on so much cash — the country’s households have amassed ¥1 quadrillion ($7tn) in bank savings — and look to stock markets for better returns in response to rising living costs.
We can’t move on into June without recognising how thin the rally was in May. The top 10 stocks by market-cap in the S&P500 rallied an average of 9.11% in May. But the other 490 stocks fell by an average of 4.11%. Unless you were overweight tech stocks that got caught up in the AI bubble, you likely had a rough month.
If you are like me and still overweight high dividend payers or Energy, you got crushed to the tune of about 7%.
The Fed will meet June 13th and 14th. The market says 75% chance of pause. But 100% chance of a hike by July. Which means one in either June or July, probably July. Then bizarrely, still thinks there will be cuts before the end of the year. That won’t happen. Not with Biden’s new bulging wallet and increasing wages.
Company earnings are now forecast to be the same in Q2 as they were in Q1 as analysts have raised expectations. They have also raised Q3 and Q4. More Bull market stuff.
Then there’s the VIX. It is now under 15, something that has not happened since February 2020. This measure is saying everything is back to normal.
So its Bull Markets all round is it?
It could well be. A lot has been written about the fact that index returns have been driven solely by large-cap tech this year. And it is true.
Is it time to switch from US Big-Tech to anything else?
It is rare for Big-Tech to outperform the rest of the market by such a margin. Over the last 100 days the Nasdaq 100 has outperformed the S&P500 by 20.8 points. The long-run average is just 1.9 points.
Friday’s outperformance for the S&P 500 (+1.5 percent), even weight S&P (+2.2 pct) and Russell 2000 (+3.6 pct) versus the Nasdaq 100 (+0.8 pct) certainly suggest such a catch-up move for non-Tech may be afoot.
With only 2 days of the month gone, our Top 30 strategy is already up 3.4%
You can’t make a determination from just a single day’s action, but we have the first signs that the bull market is spreading to other stocks and sectors.
I’ve been cautious recently because the market expectations for earnings were too high and too low for interest rates. Then we had the debt ceiling to deal with. The earnings and interest rate story is still the same but one of my first teachers told me something once that can be applied to this situation
“The market is always right. If you have a different view, you are likely missing something”
I think what I am missing is the market knows the earnings story and interest rate story but there is another way of looking at each of these.
Trough earnings are known. Things should get better from here. The same with interest rates, we are close to the top. Things should get better.
Without the Big 7 Tech names the index would be flat. With prospects of improvements in future we could be right at the start of the next leg higher for the non-tech names.
It could finally be time for our Top 30 growth strategy to swing back into favour.
I wish I could say the same thing in Australia. I fear things will get worse here. Inflation last week came in at +6.8% an increase from the prior month of +6.3%. The RBA took their foot off the brake for a short time and inflation came back. They still have a lot to do. Expect monthly interest rate hikes until we get to a similar 5% as the US.
That will slow everything except the mining sector.
Everyone expected China to rebound quickly after ending Covid lockdowns in December. But China’s first few months of reopening to the world hasn’t gone as planned for global businesses.
In recent weeks, a slew of blue-chip firms have pointed to a patchy recovery in the world’s second-largest economy, forcing some executives to warn of slower-than-expected growth.
Last week, Estée Lauder (EL) suffered its biggest daily stock drop on record after slashing its sales outlook, citing pressures in China and elsewhere in Asia. Starbucks (SBUX) and Qualcomm (QCOM) have also flagged uncertainties related to the country, which is a top market for both.
This is from Shehzad Qazi, chief operating officer of data and advisory firm China Beige Book
“The idea was that as soon as the zero-Covid policy would be over, the Chinese households and consumers would just go berserk — spending the vast amounts of money that they had been saving up over the zero-Covid and the lockdown period. This was wrong,” he told CNN. “In a way, that was essentially setting up [investors] for disappointment.”
A slow China is not good for our mining stocks. Although I did read a rumour that China is considering a new round of stimulus measures to support the property market.
Falling commodity prices are holding our mining companies back. Stimulus by China is just what we need.
Lastly for today, this is from the quarterly activities report from an Australian mining company. I will tell you who later, but decide if you want to own this first
Underlying profits of $448million for the quarter. An increase of 14.8% on the previous quarter and 20.6% on the same quarter last year.
Sales at the biggest mine up 47% on last quarter
After complaints from locals, the government conducted a review of a license in Queensland and upheld the decision for the company to begin new mining operations.
Reduced debt from $258million to just $15million
Only 30% of the way through a buy-back that is equivalent to 7% of the market-cap
Ended the quarter with $827million cash in the bank and is now earning significant interest on the funds.
Does that sound like a business you would like to own?
Ok, now I’ll tell you who it is – New Hope Coal (NHC.AX)
The best bit – the stock price is down to $4.80 which is 20% lower than where it started 2023.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.