Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords+1.9%

The stock market rally continued last week, with the Nasdaq clinching an 8th-straight winning week while the S&P 500 continued its bull run with a 2.5% gain after key news on inflation and a pause in the Federal Reserve’s rate hiking campaign.

US CPI inflation came in on forecast at +4.0% year-on-year. Those 10 straight rate rises are having the desired effect. Whilst 4% is still well above their 2% target, inflation has come down very quickly.

The surge in inflation last year was something not many investors had experienced before. But the pace of the decline this year has been equally as impressive. Looking at the above graph it is easy to see why investors are confident the inflation story is in the rear-view mirror.

Which is why Powell decided he didn’t need to raise rates this month. But he was careful to state this was a pause and not the end of the cycle. His actions do make sense. As he closes in on what he thinks is an appropriate level of restriction he can more delicately manage the level.

The minutes from the meeting showed members still expect 2 more rises before the job is done. Although markets disagree and are factoring in just one.

The interest rate story is basically over. Markets had it right and they have even backed away from the expectation of cuts this year.

Macro factors like interest rates hit all sectors. When macro factors are driving stocks they all tend to move the same. It occurs more frequently in bear markets than bull markets. Remove these macro factors and stocks and sectors start behaving independently.

When you have some stocks going up and some going down, the overall index volatility drops. So it is no surprise the VIX is hanging around the 13 mark.

It will become a stock pickers game from here in the US markets.

The outlook is not so bright in Australia.

Australia’s bond yield curve inverted for the first time since the 2008 global financial crisis, an indication that markets are increasingly pricing in the risk of a recession. The inversion means that shorter-term yields, which are more sensitive to the outlook for the Reserve Bank of Australia’s benchmark interest rate, are higher than those for longer-term debt. The pattern mirrors peers like the US, as traders bet that an extended global hiking cycle will push economies into downturns in the months ahead.

Our friends across the ditch, New Zealand, maybe a harbinger of what lies ahead if interest rates keep going up. The nation led the world in raising them to combat the post-pandemic inflation wave. Now it’s officially in recession: gross domestic product shrank 0.1% from the fourth quarter, when it dropped a revised 0.7%

The economic signs coming out of China (our largest trading partner) aren’t great, as its post-“zero Covid” recovery stalls out. On Thursday, the country released a wave of lackluster data, including that the unemployment rate for workers aged 16 to 24 rose to a record 20.8% in May. Retail sales, industrial production and fixed asset investment all grew at slower rates than expected. Frustrated by the slow economy, the People’s Bank Of China cut a short-term lending rate from 2% to 1.9%. That might sound small, but it comes straight on the heels of China’s six biggest banks trimming their deposit rates last Thursday. Put it all together, and it’s clear the government’s trying to breathe life into the world’s second-biggest economy, stat. You can bet the country has more economy-aiding tricks up its sleeve.

The constant talk of recession just won’t go away, and it is annoying me.

I don’t really care if technically Australia has 2 quarters of negative growth. All I care about is company profits. As long as companies book good profits, stock prices will be stable.

The only time I am going to worry is if we see an increase in unemployment. But that does not look like happening any time soon.

This is basically full employment. And wages are rising too, so everyone has a job and their wages are rising.

The problem in Australia is inflation. The RBA has hardly made a dent. Expect many more rate rises to come.

Over the coming weeks I am going to spend more time finding growth stock ideas for you as it’s time to get back to buying again. Have a guess where most of the opportunities lie right now?

The US is closed on Monday for the “Juneteenth” holiday. Every year I write that sentence I cannot believe that is what they called it.

In the week ahead, investors will again keep their focus on the US central bank with Fed Chair Jay Powell set to testify before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday morning as part of his semi-annual testimony before lawmakers.
On the corporate calendar, earnings out of FedEx (FDX) after the close on Tuesday will serve as the week’s top highlight. The shipping giant is seen as a bellwether of economic activity given its exposure across industries


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.