Category: Wealth Management

The Serious Money Is In Housing… But…

The ABS released their latest data on Household Wealth in the March 2024 quarter today. They say in aggregate terms, household wealth was up 2.7% in the March quarter, or $431 billion dollars.

The value of assets is skyrocketing at the moment, but incomes are hardly growing. So if you’re lucky enough to own any assets (like a residential property, or superannuation savings), your wealth is likely increasing. But if you don’t own any assets, you’re missing out.

So, the story continues, with asset prices continuing to swell, in response to policy from Central Banks and Governments, but there are two questions to consider, first will the asset growth continue, or are we reaching levels where the higher for longer interest rates will start hitting home and second, what of the growing number of households with zero assets, and a cash flow deficit.

While superficially the ABS numbers might sound promising, actually they tell a sad tale, of asset inflation, but one which few want to recognise. At least for now.

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Markets Discombobulated By Rate Cuts And Mixed Rear View Mirror Data, But Still Bets On AI Growth!

In this week’s market review, as usual we will start in the US, cross to Europe, then Asia, and end in Australia, and in passing we cover commodities and crypto.

I have been highlighting how the data driven approach by Central Banks is a problem, because as new data lands, markets try to respond, making swings in sentiment a core feature of every day.

On Wednesday we got a rate cut from the Bank of Canada, who became the first major central bank among the Group of Seven countries to cut interest rates by a quarter of a percentage point to 4.75 per cent, with governor Tiff Macklem saying if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate. Inflation in Canada has slowed this year to hit a three-year low of 2.7 per cent in April. While inflation has stayed below 3 per cent for four straight months, it is still above the central bank’s 2 per cent target.

The BoC joins Sweden’s Riksbank and the Swiss National Bank in bringing down rates and more central banks are weighing rate cuts.

And on Thursday the European Central Bank made a widely expected decision to cut its deposit rate from a record 4% to 3.75% even though inflation remains above its 2 per cent target and recently ticked up. So, the ECB was prepared to cut despite inflation clearly remaining sticky, despite persistent wage pressures and despite some signs the European economy might be improving.

Not only is it one of the very few times that the ECB makes a turn on monetary policy before the Fed, it is also the first time the ECB starts cutting rates after a tightening cycle without facing a recession or crisis. But what’s less clear is what Lagarde does next. Having delivered the historic first cut, she was very reluctant to give many clues on when the next one would be. Watch the data, she said.

And in fact, global stocks pulled back from an all-time high on Friday after surprisingly strong U.S. monthly jobs data dimmed hopes that the Federal Reserve would soon follow euro zone and Canadian interest rate cuts, causing Treasury yields to shoot higher.

So the big question is, with the Bank of Canada cutting on Wednesday night, and Lagarde going on Thursday night, does this give the RBA any more room to deliver the rate cut many Australian households and investors crave? The short answer is no!

The RBA is expected to be among the last central banks to cut rates because the Australian inflation pace is above most major economies. At 3.6 per cent, CPI remains well above the RBA’s 2.5 per cent target and a reason why money markets are only fully priced for an easing in one year’s time.

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Macro Versus Company Returns; What’s Driving The Chaotic Markets?

The roller coaster ride continued again this week on the markets, as traders were dazzled by strong corporate results from NVIDA underscoring the power of the AI super cycle on one hand, and by really mixed data signals on the other thanks to a raft of better-than-expected purchasing managers’ index (PMI) data from across the northern hemisphere, while rates higher for longer came back into focus, with hope of rate cuts being squeezed further.

The economic data points to a strong economy and inflation that won’t go away. Couple yesterday’s PMI data with a slew of Fed speakers this week and the Fed minutes, which suggested the central bank could keep rates high for longer than expected, as well as a string of warnings on inflation from Federal Reserve officials, investors have realized that either the Fed has no idea what it is doing when it comes to inflation and the path of monetary policy or investors are starting to sense that the Fed rate hiking cycle may not be over. Financial markets now fully price just one quarter-point interest rate cut from the Federal Reserve this year – compared to the six built into futures prices at the start of 2024.

European equities have traded lower at the end of the week, tracking weakness in Asia and also Wall Street as increasing anxiety over sticky U.S. inflation and high interest rates battered sentiment towards risk-driven assets.

China was hit with a wave of negative sentiment this week as a trade war with the U.S. appeared to have escalated.

A Wall Street sell-off rattled Australian capital markets on Friday as bond yields rose and investors trimmed rate cut bets, sending technology, retail and banking sector shares sharply lower.

So standing back, signs of the consensus belief in a soft landing, interest rate cuts and resilient growth in earnings are everywhere. There’s the grind higher in share market indices despite rich valuations and non-existent risk premiums (the difference between earnings yields and bond yields).

It’s worth remembering the words of an eternal bull in the late, great Charlie Munger, who urged investors to “invert, always invert”. “Turn a situation or problem upside down. Look at it backwards. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there?”

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DFA Live Q&A HD Replay: Investing Now: With Damien Klassen

This is an edited version of a live discussion, in which I discuss the latest from the financial markets with Damien Klassen, Head of Investment at Nucleus Wealth and Walk The World Funds. How have earnings season turned out, and where might the markets go next. How will the tussle between Bonds and Stocks play out?

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Into The Storm: What Next?

This is my weekly market update, starting in the US, crossing to Europe, then Asia and ending in Australia plus commodities and crypto.

An unusually strong solar storm hit the Earth overnight producing northern lights in the US and Europe and southern lights across Australia, including Queensland. Bright auroras were visible at unusually low latitudes. The G5 geomagnetic conditions could potentially disrupt power and communications with warnings to governments and critical infrastructure operators about the potential impacts on infrastructure and essential services.

This reminded me that things can be unpredictable, and markets risk surprises in the weeks and months ahead, as Central Banks, who created the massive inflation storm by their own actions, try to reverse the effects through higher for longer interest rates. Meantime Government debt continues to rise, together with the costs of debt servicing, and many ordinary households are caught in the crossfire. Yet financial markets are still hopeful.

On Friday shares in New York were modestly higher, with techs somewhat lagging. But all three indexes were up for the week with the blue-chip Dow nabbing its largest Friday-to-Friday percentage advance since mid-December. The benchmark S&P 500 index is up over 9% for the year, up near its late-March record high, following a 5% pullback that occurred last month.

The question of how independently will other Central Banks move their base rates ahead of the FED comes more into view. More broadly is the U.S. exceptionalism trade fading?

And what does the demise of Perpetual, like the fall of AMP before it, also tells us about the changing nature of Australia’s financial services sector: the growing scale and power of the superannuation sector; the rise and rise of passive investing and private capital; and the global struggle to make the listed funds management model work?

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The Scent Of Stagflation Hangs Over The Markets!

This is our latest weekly market update, starting in the US, UK, then Europe, Asia and Australia, and also covering Gold. Oil and Crypto. A comprehensive round-up of what is happening!

We are, it seems entering the twilight zone, as the scent of stagflation is spreading, as inflation becomes increasingly sticky, especially in services, while growth slows, leading to increased market volatility and questionable consumer confidence. Hopes of rapid Fed rate cuts have receded following a series of U.S. inflation readings.

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Grab A Seat Belt As Market Volatility Shakes Confidence And Prices!

This is our weekly market update.

Another crazy week on markets, as geo-political worries collided with the stronger “higher for longer to fight sticky inflation” mantra, and big-tech looking over-valued. The brief latest flare-up in Middle East tensions seemed contained with a flight to bonds, gold and the US dollar waning. Oil fell.

The Dow Jones Index rose 0.6 per cent after Tehran downplayed reports of an Israeli strike on Iran. US Treasury 10-year yields dropped to 4.62 per cent. The US dollar was little changed.

The regional escalation also briefly sent the price of gold back near its record high above $US2400 an ounce and Brent crude rose above $US90 a barrel. Both commodities pared gains after the International Atomic Energy Agency confirmed there was no damage to Iran’s nuclear sites.

As I discussed yesterday, the drumbeat of downbeat comments from the US Federal Reserve and a flare-up in inflation worries have weighed heavily on sentiment, with investors trimming their bets on the keenly anticipated central bank pivot. Federal Reserve officials have said they will need to see more data to become confident enough that inflation is headed to the 2 per cent target before starting to cut interest rates. Atlanta Federal Reserve Bank President Raphael Bostic on Thursday said that if inflation does not continue to move toward the U.S. central bank’s 2% goal, central bankers would need to consider an interest-rate hike.

For some economists, the wont-get-fooled-again mindset is now in high gear. Bank of America economists, for instance, advise that there’s a “real risk” that rate cuts will be delayed until March 2025 “at the earliest,”.

The PCE price data for March US inflation is coming next week. Consensus forecasts are expecting a mixed bag for the one-year change: a slightly higher rise headline PCE to 2.5% and a tick down for core PCE to 2.7%. We will see.

And a sell-off in the so-called “magnificent seven” technology stocks dragged the Nasdaq down 2.05 per cent on Friday and traders remained cautious on riskier assets ahead of the weekend amid geopolitical uncertainties.

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The Week The World Changed…

This week will I think mark a critical turning point across markets, as the higher for longer mantra finally took root on sticky inflation fears, geo-political tensions flared and the first flush of 1Q US results highlighted pressures on earnings ahead. All this drove a flight to the safest corners of the market such as bonds and the dollar while equities fell. Oil rallied but Wall Street’s “fear gauge” – the VIX – spiked to levels last seen in October with a surge of 16 per cent.

It’s hard to unpick the prime reasons for the falls, but US Equities had their worst day since January. The report that Israel was bracing for an attack by Iran on government targets certainly did not help. US President Joe Biden said he expects Iran will attack Israel sooner rather than later – and his message to Iran is “don’t” do it. A direct confrontation between Israel and Iran would mean a significant escalation of the Middle East conflict and would lead to a significant rise in oil prices, according to Commerzbank.
Escalating geopolitical tensions, also including attacks on Russian energy infrastructure by Ukraine, have spurred bullish activity in the oil options market. There’s been elevated buying of call options – which profit when prices rise – in recent days, with implied volatility jumping.

Also, Investors have pushed back their expectations for the start of the Fed’s easing cycle as March nonfarm payrolls crushed expectations and US inflation climbed to 3.5%, up from 3.2% and above the forecast of 3.4%. The markets have lowered the odds of a June cut to just 24%, compared to 54% a week ago. A September cut was priced in at 91% a week ago but that has dropped to 72%, according to the CME FedWatch tool.

Fed members are sounding hawkish and the markets have slashed rate cut expectations. Fed Bank of Boston President Susan Collins reiterated she sees no urgency to cut rates in the near term, given elevated inflation and the resilience of the labor market. Her Chicago counterpart Austan Goolsbee repeated that housing inflation will need to come down in order for overall prices to cool to the central bank’s target.

Meantime banks’ results offered the latest window into how the US economy is faring amid an interest-rate trajectory muddied by persistent inflation as JPMorgan Chase and Wells Fargo both reported net interest income that missed estimates amid increasing funding costs. Citigroup’s profit topped forecasts as corporations tapped markets for financing and consumers leaned on credit cards – signs that a prolonged period of elevated interest rates will benefit large lenders.

“Many economic indicators continue to be favourable. However, looking ahead, we remain alert to a number of significant uncertain forces,” JPMorgan’s chief executive Jamie Dimon said. He cited the wars, growing geopolitical tensions, persistent inflationary pressures and the effects of quantitative tightening.

And the latest economic data did little to alter the reduced risk. The Michigan consumer sentiment index fell to 77.9 in April from 79.4 a month earlier, missing forecasts of 79.0 and the data also showed that the 1-year inflation expectations and 5-year expectations rose to 3.1% and 3% respectively, piling on worries about higher for longer interest rates.

So all up, MSCI’s gauge of stocks across the globe was last down 1.2%, its biggest one-day drop in about six months, dragged down by U.S. performance. Wall Street’s main indexes all slumped well over 1% with the S&P 500 posting its biggest one-day drop since Jan. 31. The Dow Jones Industrial Average fell 1.24%, to 37,983.24, the S&P 500 lost 1.46%, to 5,123.41 and the Nasdaq Composite lost 1.62%, to 16,175.09.

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DFA Live Q&A HD Replay: Investing Now: With Damien Klassen

This is an edited version of a live discussion with Head of Investments at Walk The World Funds and Nucleus Wealth, Damien Klassen for our regular monthly look at what is going on across the markets, as many are reaching new highs, even as company returns are in question, and inflation is looking more sticky. Is a stock correction likely, and what does all this means for bonds and other asset classes?

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The FED Speaks After The Bell, As Inflation Holds Higher!

This is our latest weekly market update.

In a foreshortened trading week, the Dow and S&P 500 closed at new record highs on Thursday, notching its best first-quarter performance since 2009 supported by the AI boom and as the rally broadened out beyond tech amid optimism on rate cuts coming soon and data signaling a soft landing for the US economy remains within in reach. MSCI’s gauge of stocks across the globe fell very slightly. The index was up over 7% for the first quarter.

The S&P 500 benchmark index closed up 0.1 per cent to 5254.35; having touched an intraday high of 5264.85 midafternoon. The Dow advanced 0.1 per cent, losing early momentum for a run at 40,000. The Nasdaq Composite slipped 0.12 per cent.

But additional data including the core PCE inflation metric, the Federal Reserve’s preferred price measure came out on Holiday Friday. The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.3% from the prior month, data out Friday showed. That followed a 0.5% reading in January, marking the biggest back-to-back gain in a year. Fourth-quarter core PCE inflation was revised slightly lower. The measure is up 2.8% from a year earlier, still above the Fed’s 2% target.

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