Records abound in a week for the ages

Records fell last week with both the Dow Jones and S&P 500 reaching all-time highs amid a furious rotation into ‘value’ stocks. The record week came on the back of the successful passing of the US Government’s US$1.9 trillion stimulus bill supporting all range of beneficiaries from airlines to state governments and individuals in the form of cash deposits. The bill was among the first passed without the need for any Republican Party votes in the Senate, perhaps providing an insight into the opportunities that lie ahead. 

Speaking with a number of groups this week, it became evident that we are looking at a 1970’s style period for markets. Whilst the stimulus has been much needed, it will likely end at some time, not because there is a lack of money, but rather, reducing benefits. The 1970’s were characterised by a period of increasing inflation and subsequently interest rates, but ultimately a period of great volatility and uncertainty for equity markets. In many cases, benchmark indices flatlined for as long as 10 years before the reins were released in the 1980’s.

Closer to home we saw the questionable announcement of subsidised airline tickets in Australia, a benefit of just A$1.2 billion, not trillion, towards a tourism industry that remains on its knees. The government seems to be relying on a ‘trickle down’ benefit of flights resulting in more tourism spending, yet it is clear more support for the industry is required. Anecdotally, the Melbourne CBD remains well below capacity with large office blocks apparently at as little as 25% capacity and a long road ahead to welcome workers back to the office. That said, large brands and so-called ‘institutions’ have been the key beneficiaries of the recovery, showing that the long-lasting impacts of the pandemic will be on small businesses.

It’s another busy week ahead on the economic front, with both the Reserve Bank of Australia and US Federal Reserve set to deliver speeches, with the latter outlining their latest interest rate decision on Thursday. After suggesting that Quantitative Easing was not on the cards just a few short years ago, the RBA looks set to expand into QE 3 in less than 12 months as they seek to fight off the rallying AUD. Both Chinese and US retail sales are due on Monday with expectations of a significant rebound as lockdowns were loosened. Chinese giant JD.com announced a 31% increase in sales in the final quarter of 2020 with suggests that online sales could be even higher in 2021. This comes at the same time that category killer Alibaba is said to be facing the largest fine in Chinese history.

Inflation data is due from Europe, with a similar result to the US expected, headline inflation to be higher due to the flow through of energy and food costs, but core inflation to remain muted as conditions normalise.

The week closes with a look into US housing starts and building approvals, which will be an important leading indicator for Boral (ASX: BLD) and James Hardie (ASX: JHX) on hopes of a sustained recovery. Finally, we have Australian unemployment, the second to last before Job Keeper runs off. Experts are predicting minimal change from the current 6.4% level, but likely have little insight into what is truly happening in the economy at this point. This comes after the RBA Governor flagged a reduction in the NAIRU or non-accelerating inflation rate of unemployment from previous levels. 

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.