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Wealth Warning: Clear and Present Danger

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Another bad day for Wall Street, though the trouble emanated out of Times Square, the home for tech stocks (where the Nasdaq index resides), with Apple, Amazon, Microsoft and Facebook all clobbered. And because Apple and Microsoft are part of the 30 stocks in the Dow Jones index, the world’s most watched index dropped more than 500 points at one stage.

At the time of writing, two hours before the New York Stock Exchange rings the closing bell, the Dow was down 430 points. If the market negativity intensifies into 4pm in the Big Apple, then we can expect a shocker on our market today.

The charts, which many market experts look to for guidance, show that our important market indexes, such as the S&P/ASX 200 index, are at near crucial levels, where another leg down could trigger a big drop in stock prices, which not only will play havoc with our super fund balances but could derail our solid economic expansion.

Be clear on this: we could be seeing a huge turnaround in both market and economic sentiment this week, which could make my old student — The Dude — look like a genius. In case you’ve missed it, The Dude has been predicting market madness and mayhem for about two years.

He has been wrong for two years or has been right too early. If I’d panicked and bought his story and was purely invested in the Dow Jones index, I’d be down 31%. If I bought an ETF for the local stock market, I’d be down 14% but really, our stock market has been a serious underwhelming performer.

That said, there have been reasons, which I’ll list before trying to understand what’s going on in US markets overnight.

So here are our challenges:

• APRA’s serious lending restrictions on our banks.

• The Royal Commission’s impact on bank share prices.

• Leadership and the revolving door of Prime Ministers.

• The Trump-China trade war, with China our number one partner in trade.

• The rising cost of energy. Power prices are not only hurting the consumer, the share prices of listed companies’ headed south because of huge spikes in costs and slumps in profit.

• Government decisions to interfere in pricing for the likes of power companies and inquiries into sectors, such as aged care.

• The NBN and what has happened to the profitability of telcos, such as Telstra.

Now many of these decisions have social merit but they don’t help the overall economy of many of the related businesses on the stock market. Imagine how much higher the index would be if we didn’t have a social hate session on coal and badly behaving banks. I’d guess our stock market would be 1000-points or around 20% higher!

And if our saving graces (i.e. the strong local economy and the rocketing US economy) diminish, we could see our stock market 20% lower. And that will mean all those who wanted the corporate punishment of the companies that have been affected by the issues outlined above, will understand that there is an economic or superannuation price for living on high moral ground.

Personally, I’ve always known about this price but was prepared to live with it, based on the idea that the US economy and US profitability would keep driving Wall Street higher. My thinking was that we’d get through this period of company punishment on the coat tails of a good global economy helping overseas profits. But things abroad are changing.

What has changed? Here goes:

• The Trump-China trade war seems to be hotting up, not cooling off.

• Treasury yields on US bonds, which were trending higher (a sign of a growing economy) have started to fall slightly.

• There are fears that the Fed has raised, and will raise, interest rates too fast.

• The likes of CNBC’s Jim Cramer says US chief executives are saying the economy there is cooling (which would surprise a lot of people) even faster than many could believe!

• Goldman Sachs is headlined saying the US economy will “slow to a crawl” next year!

• Tech companies’ orders from suppliers are being used as a reliable indicator for  a slowing global economy.

• China’s economy is slowing and some of that is linked to the trade war.

• Predictions that a no-Brexit deal will play havoc with financial markets, with European and UK stock markets likely to have convulsions on the uncertainty that might bring.

• And finally, there isn’t a positive piece of news acting as a circuit-breaker  to all this speculative negativity.

Note that apart from the slowing orders from tech companies, all the bad news mentioned above is based on assumptions, suppositions and predictions. But this could be seasonal or related to the Trump trade war.

And here we have the potential circuit-breaker. Late last week, two positive China trade talk inferences were given to Wall Street and the stock market took the bait and went higher. However, the APEC bad blood between President Xi and US Vice President Pence didn’t help those of us sweating on an end to this Trump tariff torture.

And to make matters worse, it’s 10 days until Presidents Trump and Xi meet in Argentina at the G20 meeting. That’s where 19 countries and yours truly will be sweating on one country’s leader — Donald J. Trump — to finally show his deal making skills and end this madness.

Anyone hoping for a Santa Claus rally to finish off the stock market year has to hope that in 10 days’ time, market journalists are pulling out the “Don’t cry for markets, Argentina” line or The Dude will be proved right!

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Published: Tuesday, November 20, 2018


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