Mr Switzer: Hello, and welcome to Switzer Investing Insights, brought to you by nabtrade. And today, we want to look at the market ahead. Here we are in June. Is the market on the way up or should we expect it to go sideways or even possibly down, Paul?
Mr Rickard: Yeah, as always Peter, look, we normally start by looking back at what's happened so far before we talk about what's coming up. But look, a quick one on May. Look again, and I think the fifth consecutive up month in the Australian market.
Mr Switzer: That's huge isn't it, Paul?
Mr Rickard: Up 1.9% in price, 2.3% in Accumulation index, which also adds in the impact of dividends.
Mr Switzer: I think we predicted that, Paul, but still, it's good to see we're right.
Mr Rickard: Yeah, so, 10.4% year to date 2021. So if you're long in the share market, you've got a good portfolio, you're enjoying a pretty comfortable return. If we just break that down into the components of the market, Peter, it's a bit more interesting. What we're actually seeing is a very strong performance in the top part of the market. So, the top 20 stocks are leading the market higher. They're the banks, the major miners like BHP and Rio. Also some of the companies like Wesfarmers and Woolworths. That's why the market is rising. It's all at the top of the market, up 3.7% and 14.3% year to date. The other parts of the market, the so-called Midcap 50, their stocks rank 51 to 100. Look, a small gain in May, still up year to date, and the small ordinary stocks ranked 101 to 300. It's still up in May, but nowhere near as strong. So I guess we're seeing that it's really the top end of the market that's pulling your overall market a lot higher.
Mr Switzer: Well, when you think about the Coronavirus period, with people at home, a lot of companies came out of nowhere. Like for example, Kogan became a very popular company. Now, he would have been able to meet cap or small cap. It would have been an important part, that kind of company. Now, the big company says a rotation out of those ones that benefit from staying at home to the reopening.
Mr Rickard: Yeah. And another company in that top 20 is actually Afterpay, and that's actually been a drag on the top 20. So it was a big support last year, when Afterpay went into the top two. It's been a drag this year. If you go to the industry sectors, I think this is a little more telling, and these are the 11 ASX or so-called geeks sectors. Look, the big one there, the standout is financials; up 22.3% this year. That's the major banks really driving that.
Mr Switzer: Love the banks. Love the banks.
Mr Rickard: 5.7% in the month of May. The other standouts I think are just in the consumer area. So consumer discretionary, we know that the economy is going really strong. So that's helping retail.
Mr Switzer: We can't go overseas, so we're spending at home.
Mr Rickard: It's helping not so much travel companies, but car dealers and also some of the other people involved in providing goods that we're now buying. So, up 15.8%. Communication services, which is your Telstra, but also includes companies like Realestate.com doing really well as well, up 14%. And then materials. And we've seen the major iron ore companies do pretty well this year. So, up 1.7% in May, 11.9% year to date. The negatives, well, the big negative is IT. The best performing sector in 2020, the worst performing sector in 2021; down 12.3%. And again, covering a pretty tough month in May, down 9.9%. and the very tiny utility sector, which just gets tinier and tinier. And that's largely because the wholesale electricity market is ...
Mr Switzer: Really challenged.
Mr Rickard: Really challenged. And so companies and a lot of our utility companies are involved in that and doing it really tough.
Mr Switzer: So looking ahead, Paul.
Mr Rickard: Well, let's talk about what we're coming up to. I think the first thing is to recognize, Peter, is that we are in strong up trends, both in the US and Australia. And that's good for our market. We know when we're in an uptrend of a market, that momentum remains strong. So, trying to suggest the market is going to head south, it really defies the gravity.
Mr Switzer: And it's paralleled by the economy as well, Paul. It's strong.
Mr Rickard: It is paralleled, and low interest rates. We're in a very unusual time. Let's look at a couple of charts just to show that Peter, let's start with the Australian market, first of all. The top chart here shows you the so-called 30 day moving average and the 300 day moving average compared to the All Ordinaries Index. So the top chart, all ordinaries in black, the 30 day moving average in green, and the 300 day moving average in blue. And as you can see, the shorter term average is way in front of the long-term average. That's very positive, very bullish.
Mr Switzer: It drags up the 300.
Mr Rickard: It means the trend is still up. Another indicator is what's called the Coppock Indicator. That's indicator of momentum. That's very positive, reading at 25.
Mr Switzer: And see how it was falling during the Coronavirus crash, and since we've hit the bottom, bang, we're up. That's a nice, strong rebound, Paul, isn't it?
Mr Rickard: If we go to the picture in the US, and you could argue Peter, that we just follow the US in many ways. It's even stronger in the US. Again, the same top chart with the US S & P 500 in black, the 30 day moving average in green, and the 300 day moving average in blue. A long gap between those two things. So, opportunity for a pullback, but still in long-term uptrend, and with a Coppock indicator of nearly 60, a very positive momentum. So I think if you're trying to say the Aussie market is over, you're defying what the graphs and the momentum indicators say. We are still in very long-term positive uptrends. Secondly, look, the Reserve Bank came out again this week Peter, again, it's not going to move interest rates. They're going to stay low until at least 2024. At some stage, they've got to change their tune, don't they?
Mr Switzer: Yeah, and I think the strength of the economy is going to be a real telling point when we get into 2023. They'll probably hold the line in 2022, but things are getting strong at the end of '22. I think they'll raise in 2023.
Mr Rickard: But the important point for markets is; while the interest rate stays at 0.1, look-
Mr Switzer: Where are you going to invest?
Mr Rickard: Where are you going to invest, right? Thirdly, look, I suppose the biggest negative has been the so-called inflation worries. Now, I think given all the noise coming out of the US, particularly from all the fed governors there, I think the market probably accepts that the numbers are transitory. But I guess if you're looking for a bear point, it would be another bad read on one of the inflation numbers. There are inflation bulls out there thinking that this is really going to change the world. And in other words, inflation is going to be a problem and that's going to be bad for the bull market. But I think we can probably conclude at this stage, that the experts, at least from the central banks, are saying it is transitory.
Mr Switzer: Yeah. It's one thing to get inflation because of the reopening of the economy. It would be driven by that. And we're seeing petrol prices going up because the global economy starting to grow faster again. But the bottom line is; you've still got a lot of unemployment, Paul. And when you've got a lot of unemployment, that inflation eventually will not take off like it would if you were close to full employment.
Mr Rickard: I think the other really important point, as we think about June, of course, is; this is the end of the financial year in Australia. It is a time when we see tax loss. We've had quite a number of sort of high profile stocks do it pretty tough. I'm going to guess they're going to come under some further tax loss selling in June. So if you're looking for a lot of bottom leaning stocks out there in June, I'm not sure you're going to see it because there will be sellers out there. I've got a couple of losses, Peter, that it's time to throw out and get some clean stuff.
Mr Switzer: you're picking on Networks, there.
Mr Rickard: But look, it may actually spur a bit of a rally in July. And we do see that in the data. When you look at the long-term performance of the Australian Stock Market, June is typically a tough month. July is a better month.
Mr Switzer: So, sell in June, buy in July.
Mr Rickard: Yeah, it's not a hugely negative month, but June is one of the traditional negative months. And July is one of the traditional more positive months. So I think if we're just thinking about the outlook in June, it could be a little bit harder to get much momentum, in terms of the upside over the next month. But the momentum is still there. It's going to push the USI and it's probably going to drag our Australian market higher in two.
Mr Switzer: I think a summary of what you're saying, Paul, is; you showed in those charts that the trend is up. And as the old saying goes, the trend is your friend until it bends. And we're not expecting the bend anytime soon. That's Switzer Investing Insights brought to you by nabtrade. Thanks for joining us.