Weekly market update - 26th of April 2021
Written and accurate as at: Apr 26, 2021 Current Stats & Facts
The S&P/ASX 300 was down 0.03% last week. The S&P 500 lost 0.11%. US reporting season has been very strong. S&P 500 earnings have continued to see upward revisions. The current trajectory suggests the market is on 20x FY22 earnings. This is full, but much less demanding than the 24x markets had been running.
There is a reasonable potential for markets to consolidate in the near term, though likely more a pause than a change in trend.
Key factors:
- Market breadth is very wide with 95% of stocks running above the 200-day moving average. This has been typically positive for the medium-term outlook and argues against a material correction. But history suggests a period of consolidation is likely with this many stocks doing well.
- Sentiment indicators are very positive. Again, this is not a reason for a major reversal, but it leaves the market vulnerable to marginal bad news.
- The market rebound is tracking very closely to the post-recession experience in 2009-10 and 1982-84. In both cases, a consolidation tended to occur 12-15 months after the trough.
- Economic momentum is now so strong that there is some risk of a near-term fade affecting sentiment. Again, based on history, near-term S&P 500 market performance has been muted following periods when the ISM Manufacturing index has been at its strongest levels.
The one caveat here is that we are in unchartered waters given low rates, strong growth, and the shift in policy. However, at this point, near-term consolidation is possible.
In another healthy sign, we are seeing speculative froth ease off. Indicators such as the Tesla stock price, IPO and renewable energy ETFs, and speculative tech names have all rolled over since early February.
The crypto space had been holding up, but there are signs the Coinbase IPO may have marked a peak – at least in the near term. Bitcoin peaked at about US$64K on the same day and is $52K at the time of writing.
Our sense is that liquidity, which is still abundant, is being deployed into the real economy. This is a positive sign and supportive of recovery.
Overall markets were quiet last week with bond yields and equities effectively flat. It’s interesting to note that commodity prices are holding up despite the fall in bond yields in recent weeks. Iron ore, for example, was up 4.4% for the week and 12.8% month-to-date. This suggests bonds are being bought for portfolio insurance, rather than on a prevailing view that growth is about to disappoint.
On the stock front in Australia Challenger (GCF, -23.8%) was the worst performer in the ASX 100 after management downgraded earnings. The effect of lower credit spreads on margins seems to have emerged sooner than the company and the market expected. Given the outlook for rates and spreads, investors now seem concerned about further margin erosion, hence the sharp fall.
Concern about the surge in emerging market cases — and implications for global growth — weighed on energy stocks, despite Brent losing only 1% for the week. Beach Energy (BPT, -7.5%), Oil Search (OSH, -5.7%), and Woodside (WPL, -5.3%) were among the market’s weakest.
We saw an earnings downgrade from Kogan (KGN -10.9%), which was instructive. Q3 EBITDA was down 42% despite a 32% gain in revenue. A year ago KGN was priced at about $8 before peaking at $25 in October as markets priced in the surge in online sales to perpetuity. Companies that saw the benefit of increased online sales will need to manage the issue as growth rates moderate. KGN has been caught with large excess inventory, crimping margins, and leading to the downgrade.
On the positive side, construction-related stocks did well amid continued strength in the US and Australian housing plus evidence of decent pricing power. Reliance (RWC, +8.1%), Boral (BLD, +4.7%), and James Hardie (JHX, +3.6%) were among the market’s best last week.
Mineral Resources (MIN, +7.2%) hosted a well-received site visit. This emphasised the strength in the iron ore business and the opportunity in its lithium segment on the back of Biden’s push to clean energy.
A series of resource company quarterly production updates were all broadly in line with expectations.