Pearls and Irritations

The All-Ords share price index plunged 5.8% in the first two trading days of August and then rebounded 5.8% by 30 August. It ended the month just 0.3% short of where it started.

The main reason for the sharp V-shaped trading pattern of August was initial fear that the US economy could plunge into recession because of a weakening labour market.

But this was followed by good news that US inflation was tamed so the Federal Reserve would start cutting its cash rate in September to ensure a soft or no economic landing.

Australian Reserve Bank deputy governor, Andrew Hauser, has said Australia will not follow the US Fed and cut interest rates this year because inflation is still too high, and our 4.35% cash rate is not high by global standards.

Market Trends

My technical models show:

• On short-to-medium-term trend analysis, both the Australia’s All-Ords index and America’s S&P 500 index are bullish again.
• On medium-to-long-term trend analysis, both the Australian and US markets remain bullish.
• The Coppock momentum indicators of both markets are positive. They turned up in negative territory early last year signalling the previous bear market was over.

Market Rebounds after Pullback

The All-Ords share price index plunged by 5.8% in the first two trading days of August and then rebounded 5.8% by 30 August. It ended the month just 0.3% short of where it started.

The main reason for the sharp V-shaped trading pattern of August was initial fear that the US economy could plunge into recession because of a weakening labour market followed by good news that US inflation was tamed so the Federal Reserve would start cutting its cash rate in September to ensure a soft or no economic landing.

In Australia, slightly better than expected inflation data for the June quarter meant the Reserve Bank did not increase its cash rate as several analysts not only predicted, but strongly advocated. Instead, the RBA indicated that it would keep its cash rate on hold until the new year when the path of underlaying inflation (excluding government electricity price rebates) should be clearer.

The All-Ords in August after relapsing into its sideways trading range between early February and early July is now firmly above it again. See chart below.

The next chart shows how the American S&P 500 index has fared. The index fell 8.5% between peaking on 16 July and bottoming on 5 August. It then jumped 8.9% by the end of the month.

The index’s initial slump was due to two factors. Firstly, the Magnificent-7 hi-tech stocks lost favour over disappointing earnings results and concerns about the profit potential of AI.

Secondly, a sharp rise in US unemployment was seen as a harbinger of recession. Analysts expressed concern that the Fed, by keeping rates “higher for longer”, had added to that risk.

But lower jobless claims data released on 8 August steadied investor nerves with the S&P500 rebounding thereafter when the Federal Reserve’s chair, Jerome Powell, all but signalled that the official cash rate would start being cut from September since the focus was now on avoiding an economic slowdown as inflation was already tamed.

Seasonal Volatility

The US share market normally becomes more volatile from August to November. See next chart, This year such volatility could be especially pronounced since US Presidential election years add to market uncertainty. And the coming US election campaign could be the most politically polarised and contentious for more than a century. When Wall Street sneezes, other markets catch a cold. So buckle up for more intense market moves than occurred in the last six months.

Economic News

Lynn Alden, an independent investment strategist, has contrasted the differences of major economies in the current cycle as follows:

• China has had strong industrial production, but weak consumer spending.
• America has been strong in consumer spending, but weak in industrial production.
• Europe has been weak both in industrial production and consumer spending.

Australia, like Europe, has been weak both in industrial production and consumer spending.

The most important recent economic news was:

• US Federal Reserve chair Jerome Powell signalled that interest rate cuts are imminent during his speech at the annual Jackson Hole symposium on 23 August. He mentioned that “the time has come” for the Fed to adjust its interest rate policy, indicating a shift towards lowering borrowing costs.
• US revised June quarter GDP increased at a strong annualised 3.0% on the previous quarter, largely driven by increases in consumer spending, private inventory investment and non-residential fixed investment.

1. US Core PCE (Personal Consumption Expenditures) Price Index for August increased by 0.2% over July which matched the forecast. This measure excludes food and energy prices and is closely watched by the Federal Reserve to gauge inflation trends.

• German inflation fell to 2.0% in August, aiding the ECB rate cut view and the Euro area annual inflation rate for August 2024, according to the flash estimate, was 2.2% which was a decrease from the 2.6% recorded in July.
• Australian business investment dropped 2.2% in the June quarter, defying forecasts.
• Australian retail sales were flat in July after two months of upbeat results, showing large-scale tax cuts were yet to boost spending and firming expectations the next move in interest rates will be down.
• Australian household disposable incomes had the largest fall across the OECD over the past two years according to an AFR analysis. This was mainly due to Australia having variable rather than fixed rate mortgages, and not indexing its income tax brackets for inflation. This has taken household purchasing power back to 2017 levels. But high immigration has stopped a recession to date.
• Australian Reserve Bank Deputy Governor, Andrew Hauser, on 30 August, said Australia will not follow the US Fed and cut interest rates this year because inflation was still too high and the 4.35% cash rate is not high versus others.
• Australian futures market still ascribes a 90% chance to the RBA cutting its cash rate to 4.1% at its December meeting, notwithstanding Hauser’s views.
• China’s shrinking narrow money supply poses a threat to its economic growth and with it, Australia’s growth prospects.

Source: Alpine Macro

Investor Sentiment

Investors want lower interest rates because that would boost equity and property prices.

Sweden, Canada, Europe, Switzerland, UK, and New Zealand have each reduced their cash rates notwithstanding their inflation rates remaining above their central banks’ 2.0% target and staying sticky.

China has cut its policy rate to help stem its property bust, while Japan has introduced a positive cash rate after eight years of negative cash rates to stem rising inflation.

US investors recognise that inflation is on the mend so is no longer the main threat. A deterioration in America’s labour market raised fears in early August that America could slip into recession, but the US Federal Reserve’s intent to start cutting rates from September has convinced investors that it wants to avoid a hard-economic landing.

Though the US and global share market did a bungee jump in August, the biggest change was investors attitude to big-cap tech stocks. Previously Wall Street exuberance reached a zenith with artificial intelligence seen as the big breakthrough that would secure America’s prosperity for decades to come. Now, investors question this nirvana outlook and thus have gone shy on the Magnificent-7 hi-tech stocks, especially their front-runner, chipmaker Nvidia.

In Australia, economic sluggishness and sticky inflation remain the main concerns. Household purchasing power is back to where it was in 2017, but the economy has held up due to record immigration.

Expected strong earnings with dividends from some of the country’s largest listed companies have buoyed the share market, suggesting customers have run down savings rather than stop spending. But new data shows that household savings, which peaked in March 2022 following pandemic work and social restrictions, have now been exhausted.

All-Ords Drivers

Trends in the following factors largely drive the direction of the All-Ords index:

• Wall Street (the S&P 500),
• US financial conditions,
• World financial stress,
• Australian and US inflation,
• Treasury bond yield curves,
• Bond yield credit spreads,
• Copper price,
• Crude oil price, and
• Iron ore price.

Below are chart summaries of what they currently show.

1. Wall Street’s two main share price indices (S&P500 and the more hi-tech NASDAQ) are both bullish again though the NASDAQ has dragged its heels. When Wall Street is upbeat, the All -Ords usually is too.

2. US financial conditions remain loose, which is a positive signal. See chart below.

3. Global financial stress after bouncing above zero is now below it. That is positive for global stock markets. See next chart.

4. Australian annual consumer price inflation after rebounding since last December, is trending down again according to the latest June quarter data. This persuaded the RBA to keep its cash rate on hold, though it says it may need to do so well into 2025 because inflation remains sticky.

5. Australian Government Bond’s 10 and 2-Year Yield Spread is positive suggesting an improved economic outlook over the longer term. But the yield curve shape between 1 and 10-years is still negative indicating economic pessimism over the shorter term.

6. Globally, except for Japan, all other large economies still have negative yield curves along the entire maturity spectrum which is ominous.

7. Moody’s bond yield credit spread is still at a near historic low meaning investors see minor risk between investing in a 10-year treasury bond and a low credit rated investment bond. That suggests few worries about a credit squeeze. Bond yield credit spreads are also low in Australia, see https://www.rba.gov.au/chart-pack/interest-rates.html However, credit spreads have been gradually creeping up since May, which needs close watching.

8. Copper price has fallen since May reflecting China’s continuing deflation due to residential property and factory overcapacity which is imperilling global growth. Many think that “Dr. Copper” is the best barometer of global economic health because it is a versatile metal used everywhere from electrical wiring, transportation, construction, and telecommunications. Its recent stabilisation is comforting.

Note also that China is flooding the world market with cheap copper, a refection of its industrial overcapacity.

9. Oil price is falling which is welcome since it lowers consumer price inflation and improves the prospects of interest rate cuts.

10. Iron ore price has slipped and is now below US$100. Iron ore is important to Australia because mining stocks comprise a large part of the All-Ords index and the Australian government’s income tax revenue.

Synopsis:

A rebounding US share market, loose US credit conditions, less global financial stress, slightly lower Australian inflation, a positive Australian yield curve, falling oil prices, stabilising copper prices, and continued low US bond credit spreads all auger well for the Australia’s economy and stock market.

Partially offsetting this are negative global yield curves (except in Japan) and faltering iron ore prices.

Trend Analysis

Australia’s Market

Short-to-medium-term trend analysis shows the All-Ords index went bearish on 6 August when its red 10-day trend line plunging below its green 30-day one. It then went bullish again on the 19 August and has remained so. The All-Ords price momentum, as measured by the MACD, has been positive for the past 11 trading days. See Chart below.

On medium-to-long-term trend analysis, the All-Ords index remains strongly bullish though is weakening. Its green 30-day trend line remains comfortably above its blue 300-day one.

Unlike America, Australia’s stock market during most of last year swung sideways because it has few tech stocks promising new riches through AI (artificial intelligence). However, the All-Ords, like the S&P 500, enjoyed a strong rally between October 2023 and March 2024 but then swung sideways until 11 July when it jumped its previous trading range, though it plunged back into it in August before sharply recovering.

The All-Ords dark green Coppock (COP) momentum indicator bottomed at the end of December 2022 and thereafter trended up into positive territory where it has advanced, but not without volatility.

In the past whenever the Coppock turned up in negative territory it signalled the end of an Australian bear market. Only end of month readings are meaningful since the Coppock is a monthly based index.

America’s Market

The Australian All-Ords index is highly correlated to the American S&P 500 index as shown by the following chart. About 70% of the All-Ords movements mirror the S&P500, meaning only 30% are caused by local or foreign events not impacting the USA. Hence the importance of tracking what is happening on Wall Street’s stock exchange.

On 2 August America’s S&P500 share index went bearish on short-to-medium-term trend analysis because its red 10-day trend line fell below its green 30-day line. But on 16 August it went bullish again.

Its MACD momentum indicator has been positive for the past thirteen trading days, reflecting the recovery in the S&P500 since it troughed on 5 August.

For the first half of this year there was strong faith in artificial intelligence (AI) ushering in a new era of prosperity on the back of the Magnificent-7 mega hi-tech stocks – the future could not look brighter.

But poor earnings results by Tesla and Alphabet turned investors from a “risk on” to a “risk off” mood on big-cap tech stocks. August continued to be a rough month for the Magnificent -7 relative to the broader share market as shown by the chart below.

The S&P 500 index’s medium-to-long-term trend went bullish on 14 April 2023 after the S&P 500 share index’s green 30-day trendline rose above its blue 300-day trendline. It became extremely bullish after its 10.3% correction in August to October 2023. It remains so notwithstanding its pullbacks in April and July-August 2024.

The dark green S&P 500 Coppock momentum indicator turned up at the end of March 2023 and thereafter has continued rising and is strongly positive.

Asset Classes

Each month I produce “Rotation” charts showing how a selection of ASX-listed local and global sector funds have performed relative to each other over the previous nine months. This period is widely used for gauging an asset class’s medium-term price momentum. Here are the latest results for the nine months to now.

The black straight line in each chart represents Cash (AAA.ax) whose price is unmoved by market sentiment. Note that Gold (PMGOLD.ax) is a defensive asset that tends to rise when equities fall. For this reason, gold along with cash and investment grade bonds reduces downside risk in investment portfolios.

Local Assets

Within Australia, all sectors except Resources (QRE.ax) remain positive with Finance (OZF.ax) overtaking Property (SLF.ax) and Gold (PM GOLD.ax) in third position.

Resources are being worn down by China’s collapsed property and infrastructure sectors and the West’s efforts to block its exports and hinder its technological progress. If America and its allies succeed in hobbling China’s economic ambitions, it will be bad for Australia because it is our biggest export market by far.

Economists are advising China’s government to lift its social and health care security benefits so that citizens can reduce their precautionary savings and increase consumer spending. China has one of the lowest consumption/GDP ratios in the world. But President Xi Jinping wants green technology and high-end manufacturing for exports to be China’s growth driver. He is working on the Global South replacing the Global North as China’s new market outlet.

Global Assets

Globally, all sectors remain positive with Gold (PM GOLD.ax) slightly overtaking the US Market (IVV.ax) followed by Developed Markets outside the USA (IVE.ax) and Emerging Markets (IEM.ax) last.

Economists keep predicting that US investors will rotate out of overvalued US stocks to better value non-US stocks, but it has still to happen. Analysts are also saying the disparity between growth and value stock and large and small cap stocks is at an extreme, suggesting smart money will soon move to value and small cap stocks. But again, there are only fleeting signs that this rotation has begun.

These “rotation” charts appear only monthly because they are “big picture” snapshots that can be misleading if monitored from week-to-week.

What My Models Say I do not forecast markets because soothsayers normally get it wrong. Nor do I give investment advice. Instead, I gauge the market’s present trend and momentum to let Mr Market speak for himself. Then I try to rationalise its behaviour on monetary, fiscal, economic, and political grounds or technical ones such as overreach correction.

My technical models show:

• On short-to-medium-term trend analysis both the Australia’s All-Ords index and America’s S&P 500 index are bullish again.
• On medium-to-long-term trend analysis both the Australian and US markets remain bullish.
• The Coppock momentum indicators of both markets are positive. They turned up in negative territory early last year signalling the previous bear market was over.

As always this is market and economic analysis, not forecasting, let alone trading or investment advice. Market pullbacks are stock price index falls of up to 10% and corrections are falls of between 10% and 20% from a market peak. A crash is when the fall exceeds 20%.