This week’s trading gave us a sneak preview of our future

Source: nabtrade

The US jobs market, which is a bullish indicator for the overall economy, remained strong, with the jobless rate at 3.6%, which is just a tick over the 3.5% number reached before the pandemic hit in 2020. That 2019 unemployment stat was close to a 50-year low, which says a lot about what’s going on in the US despite the ongoing threat of the Coronavirus, the start of a rising interest rate cycle, labour supply problems and general supply chain bottlenecks that are driving up costs and even stifling production.

So while the labour market was strong for the quarter, with average gains of half-a-million jobs a month, the stock market was down for the first quarter in two years!

Before the close, Wall Street was trying to sustain a move into positive territory, after a negative start and this tug-o-war between the negatives of the war, supply issues, rising inflation and rising interest rates versus a fast-growing economy creating lots of jobs, will be the battle that will dominate market direction for the rest of the year.

The bears think the many negatives listed above will hurt company profits, but the bulls believe post-pandemic rebound growth, the consumer starting to spend on services as normalcy reappears, the reaction of business to the rebound of the economy and consumers and sensible central bank interest rate rises, will actually help stocks.

Also, the end of the Ukraine war will bring expected costs linked to energy and transport down, which should also help profits. Of course, it’s a guessing game but we have seen in recent weeks what I’ve been predicting, that if peace happens, stocks will soar.

Overnight, all European stock markets were up and CNBC agrees with my view that the war is a current key determinant of stock prices. “European markets closed higher to start the second quarter on Friday, with talks between Russia and Ukraine continuing to guide investor sentiment,” Elliot Smith reported. “Although volatility is expected to continue until there is more clarity on the geopolitical front, Societe Generale believes investors will come back as soon as the clouds clear.”

And there will be some investors wondering if it’s time to take a punt on peace and a European stock or ETF play. “If we have any better visibility on the situation — [the war] — those investors will come back, and … valuation is very appealing. We are now trading with more than a 30% discount on European equities versus the U.S. This is an all-time high in terms of discount,” Roland Kaloyan of Societe Generale told CNBC’s “Squawk Box Europe.”

As we saw this week, all this ‘hope for peace’ stuff and its impact on share prices will be critically important for stocks for some time. When peace talks seemed positive, Reuters reported, “that stocks were lifted by signs of progress in peace talks between Russia and Ukraine.” But in the same breath, it referred to “a widely tracked part of the Treasury yield curve, which flashed warning signs for the US economy as it neared inversion”. By the way, on more professional assessments of the yield curve, it’s actually not predicting a recession is near. In fact, even when the curve is negative, it can take more than a year for a recession to show up.

Locally our market was helped by the Budget as CommSec’s Craig James explained: “Big government spending, still-low interest rates and solid economic growth are all supportive of Aussie shares.” And it’s why I wrote that piece a few weeks back headlined: ‘Buy before May and stay!’

For the quarter, our S&P/ASX 200 Index was just in positive territory, but the S&P 500 was in negative territory, down about 5%, as this chart shows.

S&P 500 Q1

Source: nabtrade

Our Index’s heavy reliance on resources, financial and energy stocks and lesser dependence on tech stocks has helped our market outperform US markets. This is one reason why I think a 10% gain for our market this year is not a big call.

AMP’s Shane Oliver is a little more conservative on what stocks can do but he is positive about our future. 

To the local story and the S&P/ASX 200 rose 87.6 points (or 1.2%) for the week to finish at 7493.8 and that’s the third weekly gain on a trot.

Here are the big winners and losers for the week, with resources having a pretty positive week.

BHP had a good week up 4.34% to $52.39, while Fortescue rose 7.5% to $21.06. Meanwhile, the lithium plays remained popular with Mineral Resources a star as the chart below shows and Allkem joining the investor lithium party, after upgrades to future pricing excited the market.

And even though tech stocks rose and then peeled back later in the week, I think we saw a sneak preview of what will eventually happen later this year or early next, with these out-of-favour share plays. As the AFR put it: “Novonix soared 16.1 per cent to $6.41, Life360 advanced 10 per cent to $5.74, Megaport climbed 6.3 per cent to $13.82 and NEXTDC firmed 6.8 per cent to $11.81.”

If you’re wondering why energy stocks fell this week with Woodside down 2.74% to $32.68 and Santos off 0.75%, blame peace talks and the US’s largest release of oil from its strategic reserves as an anti-Russian move.

And I suspect we saw a sneak preview of what might happen to Magellan’s shares if it can give the market some good news this month when it updates its performance. The stock was up 7.87% after dipping under $14 on Monday. It finished at $15.35.

Top Stocks – how they fared:

Source: nabtrade

The Week Ahead:

Australia

• Monday April 4 – Retail trade (Detailed, Feb)
• Monday April 4 – ANZ job advertisements (March)
• Monday April 4 – Melbourne Institute inflation gauge (March)
• Tuesday April 5 – Weekly consumer confidence (April 3)
• Tuesday April 5 – New vehicle sales (March)
• Tuesday April 5 – Reserve Bank Board policy meeting
• Thursday April 7 – Payroll jobs and wages (March 12)
• Thursday April 7 – International trade (Feb)
• Friday April 8 – Reserve Bank Financial Stability Review
• Friday April 8 – Business turnover (Feb)

Overseas

• Monday April 4 – US Factory orders (Feb)
• Tuesday April 5 – US ISM services index (March)
• Tuesday April 5 – US S&P Global services index (Final, March)
• Tuesday April 5 – US Balance of trade (Feb)
• Wednesday April 6 – China Caixin services gauge (March)
• Wednesday April 6 – US Federal Reserve meeting minutes
• Thursday April 7 – US Consumer credit change (Feb)
• Friday April 8 – US Wholesale inventories (Feb)
• Saturday April 9 – China Vehicle sales (March)

Stocks shorted:

Source: nabtrade

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

Our chart of the week forms as part of a wider assessment of the Federal Budget from AMP Capital, with Chief Economist Shane Oliver predicting that government spending is set to rapidly decline from the unprecedented stimulus measures over the last two years and come more in line with its revenue as it steadily increases.

“Out to 2025 the deficit is projected to fall rapidly as covid programs phase down. However, spending is still expected to settle about a high 26.4% of GDP. This is well above the pre-covid average of 24.8% and reflects higher health/NDIS and defence spending. Rising revenue with a growing economy is assumed to do all the deficit reduction heavy lifting from 2026,” Oliver says.

All prices and analysis at 04 April 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.