Is this sell-off the start of something bad?

Wall Street finished the week on a high but registered its fifth week down on a trot, and you can blame politics, the death of a legend, Coronavirus worries and tech stock profit-takers for that. Meanwhile at home, Treasurer Josh Frydenberg has come to the rescue of bank investors, the overall stock market, borrowers and the economy by proposing to kill the responsible lending law. This law has turned bank staff into virtual financial KGB operatives, excessively analysing would-be borrowers spending, before their computers say “no” to funding requests.

This is why the Treasurer (who’s currently putting his finishing touches on the October Budget) wants to change the lending story in this country. We need economic growth in 2021 and the banks (worried about responsible lending, especially since the Hayne Royal Commission painted them as blackguards) have followed the letter of the law on loans to the detriment of the economy.

The Treasurer’s actions helped our stock market finish up for the week, which puts us at odds with Wall Street, which had another down week.

Not surprisingly, financials gained 2.96% for the week, with Westpac up 7.4% to $17.58, ANZ up 6.3% to $17.93, CBA 3% higher at $66.13, while the NAB put on 6.9% to $18.37.

Going back to Wall Street, and US shares are about 10% off their highs. But given the excessive run for tech stocks, profit-taking is now taking the cream off the surge of market indexes since March 23, when sentiment towards stocks turned positive.

Ironically, tech stocks bounced, as some professional fund managers see the recent sell off as sufficient. You have to hope these guys and gals are right because it means they believe the headwinds for stocks are manageable.

What headwinds?

Try second-wave infections, possible lockdowns, a US election with a President Joe Biden, China trade tensions and the US Congress fights over who replaces the legend of the judiciary, Ruth Bader Ginsburg, which could delay a much-needed stimulus package.

If ever you needed to be convinced that politicians care only about their pathetic jobs and progress, rather than the people (they allegedly serve) and the economy, well this should do it.

But back on the tech sell off and the buying overnight. And note how much US tech stocks have copped it in recent times.

“Shares of Apple — the largest publicly traded company in the U.S. by market cap — have dropped more than 13% this month,” reports CNBC. “Microsoft, Alphabet, Netflix, Amazon and Facebook are all down at least 7.6% over that time period.”

The most interesting sign from the US stock market on Friday was an upgrade for cruise lines from a Barclay’s analyst, and the market believed him. Think about it: in a world where second-wave infections are on the rise, how could travellers seriously be champing at the bit to jump on a Ruby Princess? But overnight, Carnival was up 8.5%, Norwegian Cruise Line rose 12.2% and Royal Caribbean put on 7.7%. Only in America!

Possibly markets might think the correction has nearly run its course. The US market is down about 10%, with the Nasdaq off 12% and our market is about 6% off its recent highs.

“We remain of the view that it’s just a correction after an excessive run up in US shares and not the start of a renewed bear market,” said AMP Capital’s Shane Oliver. “ A continued but gradual and messy recovery, along with ultra-easy monetary policy, will underpin a rising trend in shares on a 6-12 month horizon, providing coronavirus is controlled.”

I don’t expect October to be too positive with virus concerns and the US election looming. I guess a gamechanger would be a vaccine, but that’s guesswork.

This chart shows how second-wave infections are on the rise. This has to be worrying many market players, explaining why we’re seeing these sell offs.

Back to the local story and the S&P/ASX 200 rose 1.5% (or 88 points) on Friday to finish at 5964.89, which meant we put on 1.7% for the week.

What I liked

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2% to a 13-week high of 93.5 (long-run average since 1990 is 112.6). Confidence has lifted in five of the past six weeks. Sentiment is up by 43.2% since hitting record lows of 65.3 on March 29 (lowest since 1973).
• In 2019/20, net debt increased to $491.2 billion (up $3 billion from the JEFU estimate) or 24.8% of GDP. And gross debt increased to $684.3 billion or 34.4% of GDP. These numbers are unbelievably low by international standards and it’s why the upcoming Budget will bring a lot of stimulus.
• In seasonally-adjusted terms, the Internet Vacancy Index increased by 1.3% (or 1,700 job advertisements) in August to stand at 133,400. But vacancies are still down 19.5% (or 32,400 job advertisements) from a year ago.
• The IHS Markit ‘flash’ PMI for manufacturing rose from 53.6 in August to 29-month highs of 55.5 in September. The services PMI lifted from 49 in August to 50 in September. The composite PMI rose from 49.4 in August to 50.5 in September. A reading above 50 indicates an expansion in activity. And it’s good to see the services number has made it to 50.
• According to the Commonwealth Bank (CBA), card spending in the week to September 18 was up 4.3% on a year ago, compared to a 4.7% lift for the week that ended September 11. Online spending rose.
• Australia’s annual exports to China fell from $148.08 billion in July to $146.13 billion in August but it’s still a good number. Exports are up 2.4% on a year ago. Imports from China lifted from $81.84 billion in July to a record $82.45 billion in August. Annual imports were up by 5.6% on a year ago. Australia’s rolling annual trade surplus with China fell to a 13-month low of $63.68 billion in August (but it’s still a good surplus).
• The Australian Bureau of Statistics (ABS) has released the Business Impacts of a COVID-19 survey. According to the survey, “Fewer businesses reported a decrease in revenue in September (38%), compared to August (41%) and July (47%). Three-quarters of businesses (75%) expected their revenue to stay the same or increase in October.” Considering the Victorian effect, these are good numbers.
• IHS Markit’s ‘flash’ purchasing managers’ index in the US for manufacturing rose from 53.1 to 53.5 in September (survey: 53.5). The services index fell from 55 to 54 but it’s still a good number.
• New home sales rose by 4.8% to a 1.011 million annual rate in August (survey: 895,000) — the highest level in 14 years.
• Despite Coronavirus concerns, business sentiment in Germany and France improved for the fifth straight month.
• The Ifo Institute upgraded its forecasts for the German economy, now tipping a 5.2% contraction in output this year from the previous minus 6.6%.
• What I didn’t like
• ‘Preliminary’ retail trade fell by 4.2% in August after rising by 3.2% in July. Spending in Victoria fell 12.6% with turnover down 1.5% for the rest of Australia. This has to be Victoria’s fault. (Retail spending is still up 6.9% on the year and 6% above pre-COVID levels in February.)
• Australia’s population increased by 357,000 people to 25,649,985 people over the year to March. Overall, Australia’s annual population growth rate eased from 1.45 to 1.41% – the slowest pace in 8½ years. These were OK numbers but they’ll become disastrous for the next reading for March 2021, which will hurt economic growth and job creation.
• A second-wave of COVID cases across the region weighed on investor sentiment in Europe this week.
• US Congress looks set to delay more stimulus that the Fed says is needed.
• The Kansas City Fed manufacturing index fell from 23 to 18 in September (survey: 7).

Despite everything, good news trumps bad news…

My weekly look at what I liked versus what I didn’t like is still strongly to the positive. If a vaccine shows up over the next two months, second-wave infections don’t lead to extensive lockdowns in Europe and even the US and the Yanks can get a stimulus package before it sends the economy into reverse, then stock market optimism is justified. And we’re in a buying opportunity rotation, where ignored non-tech stocks are attracting overdue support at the expense of tech stocks, which is a good sign that the economic recovery is credible.

Let’s not contemplate the opposite.