If stocks don’t surge today on the local market with Donald Trump and Xi Jinping calling a 90-day truce on their trade war to pursue wide-ranging talks, then the negativity of the weight of the Royal Commission is far heavier than I thought.
To be more blunt, I will be blaming the right royal blood sport of bank bashing!
Uncertainty about what Commissioner Hayne will recommend to punish the banks, insurers, financial planners and other money industry players, and then what Scott Morrison and Bill Shorten promise to do as a consequence ahead of an election, are holding back our stock market.
The financial sector accounts for 30% of the stock market so you can see how the uncertainty hovering over the likes of the big four banks, AMP and other big name finance operations has to be a huge headwind hurting stocks.
However, with the Trump trade war headwind contained to a virtual breeze for three months, it seems likely that our stock market can and should start climbing higher. History says we are moving to the best half of the year for stocks and recent history has vindicated the chart below, which shows the months May to October average returns of only 0.95%, while from November to April the pay off of being long shares is 10.69% over the period 1998-2012. And bound to help my case for better stock showings ahead is the fact that the third year of a presidency tends to be the best out of the four years that a president influences the stock market.
Sure, oil prices, Brexit, a China slowdown and other external issues (such as overvalued FANG stocks) have brought share prices down but Donald’s trade war has directly or indirectly affected US tech sales, growth in China and even the demand for oil.
Progress with the negotiations on trade between the USA and China has to be a big plus for stocks so if we fail to join the party I bet Wall Street will enjoy on Monday, then it will be down to the Royal Commission.
Remember, the Commission with its accomplices (APRA and the RBA) have taken the heat out of the Sydney and Melbourne property markets via loan stinginess for Chinese and property investors, as well as tougher lending rules for nearly all borrowers who have the guts to ask a bank for a loan nowadays!
Thank God the rest of the economy, especially business, is doing well. And with infrastructure spending and investment looking solid, I believe there is good reason to also believe that stocks should trend higher over December and into early 2019.
If you doubt me, have a look at this recent data on our economy:
• Owner occupier housing loans rose by 0.4% in October to stand 7% higher over the year – the weakest growth rate for almost three years. But loan growth is still positive and compares to really boom house price years.
• Business loans rose by 0.6% in October after a similar rise in September. Annual growth lifted from 4.4% to 4.7% – the strongest pace of growth in 21 months.
• Loans and advances by non-bank financial intermediaries rose by 10.3% over the year to October, down from an 11-year high of 11.3% in September.
• None of the above is consistent with house price collapse talk, thankfully.
• The closely watched gauge of business plans to invest showed up as an 11.3% upgrade in investment between the third and fourth estimates – the strongest upgrade in 19 years.
• NSW business investment rose to a record high of $8.3 billion in the September quarter, while Victorian investment of $5.7 billion was a 7½-year high.
• Services sector investment hit a record high of $73.6 billion for the year to September.
• While construction work done fell by 2.8% in the September quarter (only the second decline in the past two years), in the year to September, construction work done was at record highs in NSW, Victoria and South Australia.
• Despite house price collapse talk, the ANZ-Roy Morgan consumer confidence rating rose by 0.7% to 118.6 in the past week. The index is well above the average of 114.2 held since 2014, and above the longer-term average of 113 held since 1990.
• In the year to October 2018, the Budget deficit stood at $2,345 million, down from the $3,379 million deficit in the year to September. The rolling annual deficit is the lowest for over 9½ years!
• Petrol has fallen 22.7 cents over the past four weeks – the biggest equivalent decline in a decade. This is how CommSec’s Craig James sees the effect of the price cut: “From the highs in October, capital city motorists are saving as much as $69 on a monthly basis on filling up the car with petrol, equating to a quarter per cent rate cut on a $450,000 mortgage.”
All the recent positive signs pile on top of an economy growing at 3.4% and unemployment is a low of 5%, which is the best rate since April 2012!
Seriously, what I fear most about the economy right now are all the negative and scary headlines that tell us what MIGHT happen rather than all the good stuff that is actually happening.
As FDR warned in the Great Depression: “The only thing to fear is fear itself.”