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On the 18th of this month, we saw the usual rebalancing unfold for the ASX200, one of the reasons the index does well over time as the strong enter and the weak fall by the wayside. There’s potentially a lesson here with S&P naturally discarding its underperformers and embracing newfound stars, portfolios that adopt a similar psyche over time are likely to outperform those that don’t cut losses. Remember, the best investors/traders regularly follow one golden rule: Run your profits and cut your losses. At MM, our opinion is that the second half of this saying is the most important, i.e., if a stock we are holding drops out of the ASX200 for whatever reason, we should question if it’s still worth holding.
The ASX saw the worst of it early, down nearly 50 points before another spirited recovery ensued, in quiet trade, impacted by School holidays overlapping with the Rugby World Cup. Many Fundies no doubt wish they stayed on the desk rather than witness the Wallabies limp out in the pool rounds!
The ASX200 recovered impressively from an early 100-point drop on Friday morning. On balance, we believe the index will again hold the 7000 psychological support area, although, from a technical perspective, we would need a close above 7150 to believe a swing low is in place. With all 11 sectors closing lower last week, there wasn’t much encouragement for the bulls, but we are conscious that just one week ago, it was the complete reverse.
We’re entering the last week of September, and even after Friday’s stellar recovery from the early lows, the local index is still down -3.2% with just five trading days remaining. The action was “fast & furious” during the week as investors strived to fathom the path of interest rates/bond yields into and through 2024. At MM, we don’t believe there were many surprises from central banks, but the volatility across equities suggests we were in the minority:
The ASX200 traded below the 7000 level this morning for the first time since March as the risk-off trade continued after the Hawkish update from the Fed yesterday, but a huge intra-day turnaround took hold and the ASX200 ultimately finished marginally higher, rallying 111pts from the morning lows which was simply a phenomenal effort! The intra-day buying helped snap a 4-day losing streak, though the index fell by -210pts/-2.89%.
Tech stocks traditionally don’t like rising interest rates, although, as the chart below illustrates, it’s not a perfect science. Over the last 12 months, the sector has roared ahead as a number of the mega-caps showed they could deliver earnings in a tough economic backdrop. Plus, they’ve been anticipating “peak interest rates”, but the Fed’s recent hawkish commentary has raised questions about the timing of this view into Christmas and beyond.
The ASX was knocked today, following Asian markets deep into the red after the US Federal Reserve held rates unchanged overnight, but kept the door ajar for another hike this side of Christmas. While there wasn’t a lot of new news coming from Jerome Powell and co, the dot plot projections implied that rates are unlikely to be cut by as much as previously thought during 2024, and that has rattled markets.
An increasing Australian population will ultimately lead to increased money flow into stocks and, by definition, support valuations as the growing pool of workers will likely further swell Australia’s pension fund assets to a colossal ~A$14 trillion by 2050, with a younger workforce likely to see asset allocations remain favourable toward stocks. We don’t believe the subsequent growth is currently priced into equities with the implied medium-term earnings growth for the ASX200 of just under 4.0% per annum over the next decade, comparing favourably to GDP estimates of around ~5.3% p.a. over the same period.
Shares extended their slide to three consecutive days following US markets lower in preparation for tonight’s FOMC meeting. Commodity-linked sectors of Energy and Materials saw the most pain today while a slight lift in local bond yields also weighed on Tech and Real Estate. Consumer sectors were surprisingly well supported though, as were Industrials as today’s weakness was not as broad-based as recent days – 40% of the ASX200 managed to close higher despite the index weakness.
Tuesday was another tough day at the office for Australian equities, with a +0.2% gain by the Energy Sector the only shining light as the index ended down 0.5%. It came as no surprise to MM that buyers remained on the sidelines before Wednesday night’s FOMC meeting, i.e. will the Fed hike, probably not, but the bias implied through the Dot Plot is what’s likely to determine how the market moves. With the S&P500 within striking distance of its 2023 high and the US 10-year yielding 4.3%, we believe there is a diminishing amount of room for a hawkish Fed.
