Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords-2.1%

Global markets retreated last week on news of slow growth in China and increasing rates in the US.

Looking at price charts of the S&P 500 and Nasdaq shows how steady the rally in Q2 was for the major US benchmarks. Towards the end of June, both indices started to run out of steam, but what do you expect after rallies of this magnitude when the S&P 500 has closed at overbought levels (more than one standard deviation above its 50-day moving average) for over five straight weeks while the Nasdaq is riding a streak of more than eight weeks of overbought closes.

Unfortunately, the same can’t be said for small cap or international stocks. While it has established a modest uptrend from its October low, the Russell 2000 remains stuck in a downtrend. Not only is it nowhere near 52-week highs, but it’s also over 6% below its YTD high as well.

Stocks in Europe have also run out of steam in recent months. The STOXX 600 has started to carve out a short-term downtrend and in the process has also broken below its 50-DMA. One potential positive for the index is that this week’s decline paused at the 200-DMA which is a level that has provided significant support two other times this year.

For US equity indices, it was pretty much weak across the board this week. Through early afternoon on Friday, the Nasdaq 100 was the only index ETF up for the week while the Dow was the biggest laggard. What else is new? At the sector level, though, there was a decent amount of dispersion. Five sectors finished the week higher while six were down. Communication Services was the biggest winner with a gain of nearly 1% while Health Care and Materials both fell over 1%. International markets had a rougher week than their US peers. The only country ETFs with gains on the week were Mexico, China, Israel, and India while most European countries experienced declines of 2% or more.

Friday’s release of Non-Farm Payrolls (NFP) came in weaker than expected ending what was a record streak of better-than-expected readings. At 34.4 hours, the average workweek is now actually slightly below the average since 2010, but the growth in average hourly earnings remains well above its historical average, even as up until this point, it has not been able to keep up with inflation.

This continual wage growth is a problem for the Fed. They are trying to slow spending but employees still maintain sufficient power to demand higher wages and afford a high level of spend.

Traders are back to thinking the Fed isn’t done yet. And the Fed is confirming that view

“Almost all” Fed members expect more rate hikes this year despite the pause last month. The widely accepted view is 2 more hikes before the cycle is over.

That sent the 2yr yield back to the highs of February.

And high interest rates are a headwind for stock price appreciation.

This is straight from the Fed horse’s mouth: “(Internal economists at the bank are) continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery.”

But traders are looking past today’s news. They are hoping the Fed has it right and we do have a mild recession later this year. That will cause the Fed to lower rates, making stocks more attractive and companies will cut spend to maintain profits, leaving them in a better position with higher profit margins once the recession ends.

Talking of recession, New Zealand could be the canary in the Australian mine.

In New Zealand, where the Reserve Bank has been swifter in its rate-hiking regimen, house prices have fallen by the most in eight months in June, showing the market their has yet to find a floor. More than one in 10 New Zealanders with a mortgage, personal loan or credit card are behind in their repayments, while company liquidations have increased 35% on the same period last year.

This shows the fine balance a Reserve Bank has while walking the tightrope of monetary policy. Too little and inflation becomes sticky (as in Australia) too much and you push your citizens to the wall.

One area that does concern me is commercial real estate. If you how any commercial REITS in Australia have a good hard think about getting out before more news like this breaks.

Australian Retirement Trust, which manages A$240 billion, has slashed the value of its office assets by as much as 20%.

An office building is valued based on the income it produces. With so many still empty offices, commercial office income is low, and with that comes lower values of the office blocks themselves. These REITs need to revalue their holdings and as you can see, this revaluation process is going to be brutal.

What will be really interesting is how the banks react to this. If you devalue a block that changes the loan-to-value ratio of the loan and could result in banks requesting significant deposits to bring it back in line. That could lead to bankruptcies and fire sales.

It’s a low-odds possibility as the banks won’t want to write off the loans, but it is one I am watching for news about as it has the ability to really cause problems should it occur.

If you are wondering why Aussie stocks are at 50-day lows, then look no further than China.

Another month, another truckload of data showing that China’s economy isn’t going in the right direction. Just look at the country’s service sector, where growth slowed to its weakest pace since January last month. And that’s far from the only fly in the ointment: manufacturing activity, for one, has now been shrinking for three straight months. That comes as weaker consumer spending, a shaky housing market, and high youth unemployment are all threatening the economy, showing that China’s not exactly on the firmest foundations right now. And that means all eyes are on the government’s next move – especially with the all-important Communist Party meeting coming up later this month.

The week ahead will bring inflation numbers in the US ahead of the Fed meeting on July 25th-26th. But we are in a traditionally strong period for the year.

Those of you who bought my last recommendation, Iris Energy (IREN), have done well in the last two weeks with the stock already up 45%. I got lucky there with the timing, but you make your own luck in this game. Even though it is up significantly, it probably has a lot more to run still.

I’ve got a few more on my shortlist so next week we will take a deeper look at one or two and see if we can pick another winner.


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.