Brisbane boost

Brisbane housing lift

Brisbane is set to get a boost from the cheapest mortgage rates in living memory.

Of course, asset selection in a less mature capital city housing market is paramount.

You can download our free buying guide here.

Via the Courier Mail:

Fed cuts 50bps; stocks tank anyway

FOMC emergency rate cut

The Federal Reserve all but targets stock markets these days, and predictably reached for the panic button by cutting interest rates by half a percentage point.

This was the first emergency rate cut since 2008, this time around due to concerns about the impacts of the coronavirus:

Source; Federal Reserve

There may well be more rate cuts to come, too, since the economic impacts of the virus appear to me to be significant all around the globe.

Stocks peaky

I went mostly out of stocks and into cash last year, for the reasons explained at (characteristically too much!) length on my Low Rates High Returns blog. 

If you work your way through the posts from the beginning you'll understand my point of view.

This generated a few lively messages, but remember that's just what I'm doing - there are plenty of ways to invest and you need to do what's right for you, your circumstances, and your stage of life (averaging into the market is still a valid approach, for example...as long as you stick with it). 

My belief was that valuations were extremely high, and there's a lot of available data to suggest that real expected 10-year returns when valuations are so far above their long-run average are likely to be negligible.

Back to the CAPE

It's quite remarkable to see the Fed slashing interest rates in a panic when stocks are only 10-15 per cent from their all-time highs, although markets weren't all that impressed, the S&P 500 sliding by another -3.1 per cent at the time of writing (edit: with a subsequent slight rally into the close).

This is a period of heightened uncertainty which means lots of volatility and 'whipsaw' trades.

Note that I went mostly to cash well before the coronavirus was a thing, based on valuations alone.

Now I'm concerned that the economic disruption could punch a big hole in earnings as 2020 rolls on, at a time when PE ratios had already been extremely stretched.

To help prevent kneejerk responses, the CAPE ratio uses a smoothed 10-year average for earnings per share, so it looks through short-term volatility in corporate profits.

And being a 10-year measure it tends to have an accord with the business cycle, as well a reasonably strong correlation with subsequent 10-year returns.

The CAPE ratio for the S&P 500 has come back from about 33 to 28, but remains well above its long-term mean of 16.7 (and even further above its long-term median of 15.7).

The US comprises about half of the global market cap, so generally speaking it's important to follow what's happening in this market.

The CAPE ratio isn't a perfect measure, but has historically had a strong predictive power over 10 years for expected returns.

There's a certain truth to the point that low interest rates push investors from fixed interest to equities.

But also remember that interest rates aren't near record lows because the global economy is booming - lower rates generally reflect lower growth. 

Low rates typically aren't great new for bank net interest margins either, and banks comprise a fair chunk of the Aussie market. 

Investing is a marathon, not a sprint, so my thinking was that I'd get better opportunities to deploy my capital with less downside risk later.

But, as I said, that's just me.

The most important thing is having a firm strategy and sticking with it. 

Sydney listings down 26pc from 2019

Stock down from 2019

Property listings finally surged in Sydney and Melbourne in February 2020 after the long and quiet break, with new listings about 60 per cent higher in those two cities plus Canberra the month according to SQM Research. 

But still 5 of the 8 capital cities recorded declines in total stock from a month earlier.

All capital cities recorded year-on-year declines in listings, with Sydney down by a thumping 26 per cent, so it's still tough going out there for prospective buyers, despite the increase in new listings. 

Nationally total listings were about 14 per cent lower than a year earlier at 296,000.

Asking prices increased 0.7 per cent in February for both houses and units according to SQM Research.

---

With today's monetary policy decision noting that rates could be eased further, we could be at the effective lower bound as soon as next month.

Source: ASX

Morrison is finally set to roll out some stimulus measures, aimed at small and medium enterprises.

Dwelling approvals lowest since 2013

Approvals resume downtrend

January tends to be a quiet month for unit approvals, and it certainly was this year in Sydney (1,083), Melbourne (1,059), and Brisbane (337), as the downtrend resumes. 

House approvals have generally now stabilised, except in Sydney where supply still needs to be absorbed. 

Overall, seasonally adjusted dwelling approvals slumped to just 13,000 for the lowest result since February 2013. 

Public sector approvals barely feature these days.

And the high rise downturn in Sydney and Brisbane continues.

Less well reported has been a huge surge in non-residential activity in Victoria, including for healthcare centres and other commercial ventures, which has helped to lift the total value of building approved a little, despite the residential downturn. 

The Reserve Bank's liaison thinks that it can see across to other side of the trough for the construction sector - at least, it did back in October - but we're not there yet with residential approvals still weakening. 

---

The Reserve Bank cut interest rates by 25 basis points to 0.50 per cent this afternoon, with no fewer than nine references to the coronavirus in its statement.  

Westpac and Commonwealth Bank immediately passed on the full 25 basis points to variable rate home loan customers. 

Earnings must surely cop a beasting as a result of stalled activity, so it's hard to see how extremely high global stock valuations can be sustained (IMO). 

Why do we focus on negative news?

Downbeat news

Negative news - why do we focus on it?

And is this a bad or good thing?

I discussed this and more on the Yardney podcast here:

Don't forget to subscribe for free, for all future episodes (when we'll have better sound!). 

Grip on surplus slips...

GDP partials

Gross operating profits fell -3.5 per cent in Q4, as mining profits slipped, punching a hole in national income after a strong run. 

Still, 2019 overall was a strong calendar year for profits on commodity prices strength. 

Wages and salaries payments were up +1 per cent in Q4 (prior quarter revised: +1.1 per cent), as the number of hours worked has eased. 

This took annual growth up from +4.8 per cent to +5 per cent, but the quarterly momentum is now fading again... 

Inventories were up +0.3 per cent in Q4, and will add a small contribution to GDP growth in the December quarter. 

Overall, growth in the fourth quarter of 2019 looks likely to be a soft result, and the elusive Budget surplus appears set to glide tantalisingly out of reach.

Given the sea of woeful data, the focus should be opening the spigots now anyway, to stimulate the economy out of a hole.

Detailed analysis as always from the ledge James Foster at Macro View here. 

---

As expected, CoreLogic reported a broad-based +1.2 per cent increase in housing prices in February, led by Sydney, Melbourne, and Brisbane.

You can download their full report here.

The long slow march to zero (Part X)

Rates to fall

A rate cut tomorrow is all but a done deal, according to market pricing.

In fact, markets are pricing a 128 per cent chance of a cut at the time of writing.

Source: ASX

In other words, beginning to price in the risk of a greater than 25 basis points cut.

Most likely it'll be 25 basis points, according to observers, with a follow up cut quite possible over the coming months.

Australia's 3 year bond yield has fallen to the lowest level ever at 0.35 per cent.

Even the 10 year bond yield has hit a record low 0.71 per cent.

Whether this month or over the coming months, we're heading for an era of record low rates...

Everyone's gotta plan, until...

System 2 thinking

Some woeful international data is feeding through this week.

What on earth should you do next?!

Here's what (or click on the image below):