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The worst October in five years has seen active money managers cut their equity exposure to its lowest level in more than 12-months as the trifecta of bad news continues to weigh on stocks. The US S&P500 has already fallen by more than 1% on five occasions in October, and we still have two sessions remaining. With Apple reporting on the 2nd of November, next month also looks likely to start with ongoing elevated volatility.
The ASX200 added to October’s woeful performance, falling another -1% last week, taking the infamous month’s decline to -3.15% with two sessions remaining – bring on Wednesday! Over the five days, the resources helped stem the losers, while the interest rate-sensitive real estate and tech names led the declines. Under the hood, there were some standout moves over the week in both directions as the index posted new lows for 2023
Equities managed a modest gain into the weekend, bucking the weakness of US markets overnight, though largely tracking the gains seen on their futures today. Investors were still wary of loading up too much risk today, highlighted by the weakness in the Tech sector today. Staples was a key winner, that sector hit 3-year lows yesterday but a broker upgrade for Coles (COL) saw some support.
As the ASX200 plumbed levels not witnessed since early November, it wasn’t surprising to see numerous stocks make fresh 12-month lows. However, it should be recognised that the broad-based nature of the weakness is very real, i.e. over 15x more stocks registered new 52-week lows as opposed to 52-week highs. What did catch our attention was that the large losers column was littered with many extremely poor performers over recent years; as we’ve been saying almost ad nauseam, the weak are getting weaker at this stage of the cycle.
Shares were 1pt off a 12-month low intraday today with pain in the interest rate leveraged Tech and Real Estate sectors under the most pressure. Tech was hit particularly hard following a soft session for the Nasdaq overnight and follow-through selling seen on its futures today. Materials once again put up a reasonable fight thanks to support in Iron ore stocks, and the second biggest sector constituent for the local market finished marginally higher.
The ASX200 regularly has a clearing of the decks for a number of reasons, from takeovers to deep underperformance leading to a business losing its status as a top-quality large-cap business, and vice versa. Last September, we saw the exit of stocks such as Zip (ZIP) and City Chic (CCX), which had both endured their stock plunging from +$14 and +$6, respectively, to around 30c, by definition crushing their market cap in the process – two of the main criteria of eligibility to be in the ASX200 are market cap and liquidity.
The market was relatively strong early on, supported by solid overnight gains in the US and most commodity markets, however, the music stopped at 11.30m as local inflation data came in higher than expected. The ASX200 index fell 65pts from high to low by early in the afternoon, but a small fight back, led by the Materials sector with commodity support, helped to stem the bleeding with the final result of only a small fall on the market. That came despite just 2 sectors closing higher while Real Estate copped the brunt of the pain.
At MM, we continue to foresee the next major swing in bond yields will be lower, and we believe they are “looking for a top”, but as we’ve said a few times through 2023, trends post the GFC have been lasting longer than many imagined. Also, it’s important to recognise that falling bond yields won’t necessarily be good for stocks if they’re driven lower by a weakening economy, or a recession, but it will fuel some dramatic stock/sector rotation – Dr Copper has been flagging looming economic problems since January with the economic bellwether down ~19% from its 2023 high.
Some signs of buying helped support the local market today, driven in particular by the heavy-weight sectors of Materials and Financials. The support there helped put an end to a 3-day rout which had set the ASX200 to an 11-month low. Locally, the focus will turn to inflation data due out tomorrow morning, the next print to determine where rate expectations head in the short term.
MM is taking profit on WDS and buying GMG in the Active Growth Portfolio
