Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
US rally ended with a thump
– Are fears of US rate hikes justified?
– Global growth still has strong prospects
– Australian unemployment rate falls but inflation stays low
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.
The Big Picture
Six consecutive months of capital gains on Wall Street were ended with a correction in October – eradicating all of the gains made in 2018. It is important to note that this correction could not have been precipitated by gloomy economic data. There wasn’t any!
While everyone is entitled to nominate reasons for the correction, it is not possible to attribute it to various causes with any degree of certainty. The best we can do is focus on what hit the headlines – and then look through the noise at the fundamentals.
The downturn did start within hours of US Fed chairman, Jay Powell, making a very strong statement about being able to be aggressive on rate hikes. And he made no soothing comments even as the market fell by up to 10%.
Of course, Trump was never far from the spotlight. His repeated ‘upping the ante’ in the trade war couldn’t have helped. The latest is that he is reportedly planning even more tariffs for China trade if China does not make progress at the table.
The US mid-term elections are due on November 6th. Pundits are forecasting the Republicans likely to keep control of the Senate but lose control of the lower house. But both reported probabilities are sufficiently woolly to allow for an upset. If Trump loses even control of just the house, his presidency will lack the support he needs for further reform.
When we look at the new economic data reported in October, we see a glowing score-card for the US. Economic growth came in at 3.5% after a 4.2% in quarter two. The IMF just reported its US forecast for 2018 of 2.5% which is already now overwhelmingly seen as far too pessimistic. Three percent plus is on the cards.
The Fed’s preferred inflation measure came in at 1.6% which is well down from 2.1% in the previous quarter and the 2% Fed target. There are no apparent inflation pressures bubbling under that might require sharp rate hikes. Indeed, very gradual increases in rates seem the way to go!
The US bond market did react pushing the 10-year rate well above 3% but markets can jump at shadows. When the Fed likely raises the rate in December the key information sought from the Fed press conference by analysts will be the so-called “dot plots” indicating the most likely course of action in 2019. Given the economic data, we feel that markets and the Fed will settle by then.
Even earlier, Trump may seal a deal with China over trade. It is said by many that he wins votes from both sides of politics by looking tough with China. Whether the race is won or lost after the mid-terms, Trump can then settle the trade talks before real harm is done to the US economy, hence we remain positive in relation to US stocks in the near term.
The IMF did forecast world growth of 3.7% for each of 2018 and 2019. These forecasts are now the same as those from the OECD. China reported growth of 6.5%, which was a slight miss, but very good producer and consumer inflation statistics were posted.
The Australian unemployment rate fell from 5.3% to 5.0% for the latest month. Full-time jobs growth was also strong.
At times like these, it is important to remember that when people sell shares someone else is buying them! We think that those who bought in October might look very good in months to come. Reporting season for the US banks has been very strong but there were some notable misses in the rest of the company reports.
In the long run, market prices reflect the underlying strength of the economic fundamentals, for which we remain optimistic. However, in the short run, fear or hubris can take markets almost anywhere, the middle weeks of October being an example.
Our ASX 200 had another down month in October ( 6.1%). All sectors experiencing meaningful losses but perhaps the biggest losers were those stocks that were priced (“to perfection”) for strong growth. However, the rally at the end of October saw recovery in those same stocks.
The banking sector has projected dividends of 8.5% plus franking credits because stock prices have been sold down so strongly. With the sector proposing to divest wealth management business, capital gains for the sector are harder to predict. There is the prospect that this very large sector might soon end its poor run over recent years and start to recover – which in turn could boost the ASX 200.
The longest run of consecutive months of capital gains in recorded history for Wall Street ended with a thump in October ( 6.9%). We think it is far too early for a slow-down in the US economy to be on the cards. Rather, we think October represented a case of the jitters after the US Fed chairman spoke out of turn.
Most major global markets and regions experienced declines in the magnitude of 5% to 10% over the month as the same macro-economic and geopolitical factors affecting the US market, namely rising interest rates and trade tension between the US and China came to bear. Encouragingly the last week of the month saw markets take a breather and consolidate in the short term.