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Two good news events are great for stocks

Peter Switzer
15 December 2023

Two pieces of news explains why the stock market surged on Thursday and is set to do an encore performance today. Apart from bolstering the super balances of all Australians, I loved seeing these two news events as it justified my optimism for stocks for this December quarter and probably for 2024.

By the way, I think it’s highly likely that 2024 will be great for stocks but I used the word “probably” because there can be ‘surprise’ curve balls that can spook stock markets.

That said, as we’ve seen this year with the Hamas-Israel tragedy, stock markets can get over shocking geopolitical developments.

So, what were the important events?

First up, on Thursday, we woke up to the news that the Federal Reserve didn’t raise US rates. This made most of the financial market experts presume that rate rises in the US are over. But the news got even better, when the usually poker face cautious central bank boss, Jerome Powell, gave away hints that maybe rate cuts could come earlier than he was suggesting some months ago.

Before he did that, the market was arguing with itself, with some experts saying that those thinking rate cuts were closer than others thought were nuts and ahead of themselves. So, when Powell added his comments that rate cuts could be sooner than even he thought, the stock market went stir crazy positive.

At the time of writing, US markets were positive again and our stock market is tipped to start 42 points higher today, if you can believe SPI futures.

In case you forgot or didn’t know from early 2022, rising rates hit the share prices of a lot of growth and tech companies, so the news that rate rises are over and could be replaced by rate cuts has meant smarties are buying stocks today that have been beaten up.

This buying augurs well for 2024 provided inflation keeps falling and then rates start to be peeled back. Also, there needs to be a belief that the US will avoid a recession and will have what markets call a “soft landing”.

At this stage, that’s what the market influencers are believing, and that’s why Wall Street shot up yesterday and we played follow the leader.

But wait, there was more, and it was locally driven, though it has a big question mark over whether the news was good or just OK. Yesterday we learnt that unemployment went up from 3.8% to 3.9%. This isn’t great news for job seekers but is good for rate worriers. Rising unemployment means the economy is slowing. This will help lower inflation, as well as mean that maybe our rate rises are over. Like the Yanks, then it could mean we’re closer to a rate cut, say in mid-2024, rather than the expectation that we might have to wait until around September.

However, not all the news screamed inflation might be on the way down because we created 61,500 jobs rather than the subdued 10,500 predicted by economists.

Now all this is a bit confusing because we’ve had 500,000 news migrants this year. This has played havoc with interpreting what’s going on in the economy using labour market statistics. The fact that these statistics also show that 81,000 people have lost jobs in the year to November, shows how hard it is to work out whether rate rises have done their job to slow the economy.

The best guess is that if we had a much smaller rise in immigration, unemployment would be higher because immigration helps economic growth and job creation.

Despite these confusing signals, economists such as Betashares’ David Bassanese saw the numbers as positive for beating inflation beating. “The good news is that the easing in labour market tightness remains gradual, consistent with a likely ongoing soft landing for the economy – not recession - as we head into 2024,” he told the AFR.

NAB senior economist Taylor Nugent agrees telling the AFR that the figures were a “best-case scenario” for the RBA. “Cutting through the noise, the data continues to suggest some ongoing gradual cooling is occurring in the labour market alongside higher labour supply rather than a material slowing in labour demand,” he said.

The summary is that that these rate rises are working but we should avoid a recession. The overall numbers don’t tell us inflation’s fall is as good as the USA’s, but we are heading in the right direction.

Important inflation readings for December in mid-January and then late January for the December quarter will be crucial for future rate rises but if they show inflation is falling, I could be telling you rate rises are over.

If that happens, it will be great for rate worriers, super members and stock players. And by the way, looking at other economic data, it’s a good chance that these groups will have a nice start to 2024.

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