Where are these headlines? Good economic news drives stocks higher

Published on switzer.com.au 29 May 2020.

Now hear this. Now hear this. Really smart people out there are starting to see the potential for this terrible economic collapse to end up being not as bad as expected. One of these is one of the smartest guys in the room, when it comes to the Australian economy.

Another is the smartest guy in the room in the White House. Some Donald ‘haters’ might be thinking: “That wouldn’t be too hard.”

Unbeknown to most Aussies, there has been a gradual collection of improving economic news that has made professional stock market players join the courageous investors who’ve been buying good quality companies/stocks at low prices.

I know many fund managers and brokers, who expected another big leg down for stocks, were holding a pile of cash. They were operating off the history that these big stock market crashes, which are certain to create a recession, often have a second leg down crash, which can be more severe than the first.

In the GFC, the combined effects of the failure of Bear Stearns and then Lehman Brothers took the stock market down 41% between May 2008 and February 2009. The first leg down from November 2007 to March 2008 was a 21% slump.

This kind of history has made a lot of people think another crash is out there waiting to happen. And they could be right but as Warren Buffett has said many times: “If past history was all there was to the game, the richest people would be librarians.”

I’ve been arguing that I’ve never seen such big and fast rescue plans from governments and central banks ever. This could be historically significant in helping stocks and economies to rebound faster than expected.

Our stock market is up 6.5% this week and now out of bear market territory, being down 18% after being down close to 37%!

That very move from being down 37% to only being down 18% screams that the key drivers/influencers of the stock market are progressing from being very, very nervous and nearly ready to jump out of windows from very tall buildings, to start to buying beaten up stocks on the basis that the better-than-expected economic rebound will feed into better company profits and that justifies better stock prices.

If you’re on a unity ticket with Donald Trump that the Chinese Government caused this “China virus” to go global, then we should be cheering the governments of the world who’ve helped turn this health and economic tragedy around quicker than most would have expected.

But we can’t rest on our laurels, with the RBA Governor, Dr Phil Lowe, one of the best economists in the country (which explains why he got the top job at the Big Bank) suggesting that things are looking up.

Speaking to the COVID-19 committee, he said the jobless number was better than expected and the economy looked like it was “bottoming out.”

That’s huge positive news that all Aussies should hear if we want them to ditch uncertainty and fear for positivity and hope, which are pretty good inputs into creating a stronger economy.

And what about letting us all hear this too?: “The economy is doing better than was feared.”

He was happy to hear that the economy didn’t need the JobKeeper payment for six million workers but only three million, which he would’ve been seen as a positive reinforcing sign for the economy. However, he’s not arguing the Government should pull up stumps and pocket the dough.

He knows saving and even lending aren’t as important to spending and the Government needs to watch the economy and be prepared to spend more when JobKeeper ends in September, if that’s what’s needed to bring about great growth in 2021 to cancel out the slump in growth that happens this year.

Recently, the RBA thought economic growth would contract by 10% and unemployment would spike to 10%. Clearly, Dr Phil is thinking these calls might have been too negative and too big. Let’s hope he’s right!

Early in this Coronavirus and closing of the economy drama, the IMF and RBA thought we’d contract by 6.7% in 2020 and then surge by 6.1% in 2021. So maybe this could be a more accurate guess on what will happen. And for this we can thank our great results fighting the virus.

Dr Phil told the committee that “the health outcomes make it ‘entirely possible’ economic outcomes will also be better.” (AFR)

The biggest and best indicator that smart people are redoing their numbers on our economic future was the enormous rebounding in bank share prices this week. Banks provide the lifeblood to the economy via credit. For NAB’s share price to surge 22.4%, it’s screaming out loud that the economic smashing expected for us has been downgraded.

This is sensational news that should be broadcasted from the highest hill and on every media outlet in the country.

Of course, bad news could turn it all around e.g. Donald Trump causing a trade war over Hong Kong or because of China’s annoying ways with spying via Huawei or whatever. But for the moment, let’s start celebrating the achievements of taking on this virus and being on top.

On Monday in my subscriber newsletter, The Switzer Report, this was the guts of my lead story: “If a quicker-than-expected recovery emerges, then you can rule out another big second leg down for stocks. Here’s why I think investing in banks now for a pay-off over the next decade looks like a good play.”

That surge in bank share prices this week made me a very happy market tipster.

Of course, economies and markets can be unpredictable, so watch this space.

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