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Stocks to surge or slump on two looming data drops

4 November 2022

Stock markets are poised to surge or slump as the US awaits two crucial pieces of economic data that will give a clue about what the Federal Reserve will do with interest rates. And what the US central bank does can have a big bearing on what our Reserve Bank will do here in coming months.

For last night’s Switzer Investing TV program I interviewed one of the smartest economists in the country, Michael Knox of the brokerage business Morgans. He’s my go-to man on the Aussie dollar. I wanted his take on our currency because I want to invest my money and my financial planning clients’ money in the eventual rebound of the US stock market.

I learnt in the early 2000s (after the Nasdaq Index was smashed in the dot.com crash of the stock market) that hedging the Aussie dollar when it’s at a low point and you want to buy US stocks.

After the dot.com crash, companies such as Microsoft fell from $58 to $21. It’s now $214. To make money out of the eventual rebound of the good tech stocks, I invested in the QQQ exchange traded product that gave me tech company exposure in the US.

It was a smart play, but my gains were reduced by the steady rise of the $A. I learnt that when the Oz dollar is low (it’s now at 63 US cents), if you hedge your investments, it takes out the potential currency losses.

That’s why I wanted Knoxy’s best guess of the $A and what the Fed boss Jerome Powell said yesterday actually changed his answer.

He said most economists expected Powell to soften his language and imply his tough 0.75% rate rises are working to lower US inflation. Instead he maintained his tough talk.

This pushed bond yields up, which says the bond market now expects US rate rises to continue longer than expected. In turn, that will keep the US dollar strong and delay when our dollar rises.

If the talk was more accommodating from Powell, we might have thought the rate rises were nearly over in the US, which would mean the greenback would soon fall and the Oz dollar would rise. While that could be delayed until mid-2023, Knox says it will happen.

So timing your hedging might be the key for your short-term returns, but Powell’s comments might be purposefully exaggerated to the negative because he doesn’t want to stop scaring US consumers and stock players until he knows inflation is really falling.

Tonight, the Yanks get the latest jobs report and this could be a clue for what’s happening to inflation. If unemployment is rising and employment is falling, then bad news will be good news for inflation and interest rate worriers. It will also be great news for stocks but this data drop isn’t as important as the one next week on November 10.

By Friday morning our time, we’ll have seen the October Consumer Price Index for the US. If it’s a noticeably lower number, the stock market will love it. If it’s not, there’ll be a big sell-off.

Hope is never a wise strategy with investing but I do hope a good inflation number shows up either next week or in December. If it doesn’t, we’ll be caught in this ‘up and down’ phase for stocks, which has prevailed since the middle of this year, after a terrible fall in the first half, especially for the US market.

I’m sweating on lower inflation to spark a stock market surge. The chart below shows how the S&P 500 Index for the US share market rebounds hard out of sell offs.

S&P 500