Why markets are so jittery + protect your portfolio

Hi everyone,

Geez, so much to get through this week… really important stuff which affects your financial future. Markets here and overseas are understandably jittery for a range of reasons.

Now bear with me as I take you through the most important bits. I’ll be using a lot of graphs because I reckon it makes more sense if you can visualise some of the data.

First up, experts are split on whether there are more rate rises on the way.

Why are they split? It’s because of the minutes out this week from the last Reserve Bank Board Meeting which said:

“Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve.”

So they aren’t convinced the key economic figures such as inflation, slowing economic growth and wages growth are turning quickly enough.

The RBA is particularly concerned about the impact of high wages growth on productivity and keeping inflation higher for longer.

The latest wages figures came in okay… but unemployment is weaker 

If the RBA is worried about wages and the overheated jobs market, the figures this week will certainly please them.

On Wednesday, Australian wages growth (the Wage Price Index) rose by 0.8 per cent in the March quarter, which was a bit below what markets expected.

But the annual wage growth figure of 3.7 per cent was slightly above market expectations because of an upward revision in the December quarter result.

Thanks to the lowest unemployment rate in 50 years and high inflation, wages are rising at the highest level since 2012, but the March quarter is down from December, which is a step in the right direction.

Then yesterday the latest jobs figures were released and were a lot weaker than expected.

Employment fell by 4,300 in April, after 112,700 job gains across February and March. It was significantly weaker than the market expected, which was for 25,000 extra jobs created.

The unemployment rate increased to 3.7 per cent in April, up from 3.5 per cent in March. Markets were expecting no rise in unemployment.

While wage rises are stronger than normal, it is completely understandable if you’re baffled about where that money is going. The answer is inflation.

Wages are rising but not at the same pace as inflation, which means the purchasing power of your money is going backwards. In fact, “real” wages growth has never been worse. You’re getting paid more cash, but your cash is buying less.

That’s the financial evil of inflation. It erodes the value of your money and that’s why the RBA is aggressively fighting it. Bring down inflation and your money goes further.

Those negative real wages are hitting consumer confidence

The financial stress of inflation and eroding value of cash is making us all grumpy. Westpac's Consumer Sentiment Index dived 7.9 per cent to 79 points in May, reflecting "deep pessimism after surprise rate hike and mildly disappointing Budget," according to the survey results.

“The Index has fallen back to just above the dismal levels seen back in March, which recorded the lowest monthly read since the COVID outbreak in 2020 and, before that, since the deep recession of the early 1990s," says Westpac chief economist Bill Evans.

Nearly 70 per cent of respondents expect a further rise in variable mortgage rates over the next 12 months, with just over 40 per cent expecting them to rise by a whopping one per cent or more.

That’s pretty ugly, but I was really interested in some of the breakdowns of the consumer sentiment survey.

First of all, Aussies in regional areas are gloomier than those in the city. We can probably put that down to falling agricultural prices, following that big spike after the start of the Russia-Ukraine war, and regional property prices softening after the big COVID spike.

There’s an old saying that if the value of your property is going up then you feel wealthier, even if you don’t have extra cash.

And that theory is certainly reflected here. The sentiment of homeowners is rising again as property prices rebound.

By contrast homeowners facing higher mortgage repayments are hurting, as are renters from a tight rental market and spiking rents.

Sort of makes sense, doesn’t it? And it reminds us that economic data simply reflects the actions and feelings of actual people who make up that economy.

The amount of tax we’re paying isn’t helping us fight inflation 

Last week in my Federal Budget coverage I pointed to the fact that the Budget surplus was being driven by higher commodity prices AND the huge increase in the amount of personal income tax we’re paying because of bracket creep.

So the double whammy for our family finances is those wage rises are being eroded by not only inflation, but also a bigger tax take by the government. No wonder it’s financially tough for so many Aussies.

As this chart shows, the average tax rate on ordinary Aussies is now at a record level. That’s why I said last week that those Stage 3 tax cuts next year have to go through to bring some fairness back.

AmeriCA and AmeriCANS are awash with debt… and it’s getting scary 

US President Joe Biden has cancelled his trip to Australia next week because the American government is running out of money.

To stop the US government excessively borrowing money to operate the economy there is a legislated maximum limit which can be borrowed. For perspective, Australian government debt as a percentage of the size of the economy (GDP) is 45 per cent. US Government debt as a percentage of its economy is 129 per cent.

That means the value of US government debt is a third more than the total value of its economy. And when you think the US economy is 15 times bigger than our economy, the figures are just staggering.

There’s a political argument here in Australia as our government debt reaches $A900 billion… in the US it’s $US32 trillion. US interest payments on that debt alone are nearly $US1 trillion per year.

And just to add to the financial horror show, this year the Australian Federal Budget will be in surplus… the US Budget will be a $US1.5 trillion deficit.

That’s why Joe Biden is staying home and that’s why global financial markets are on tenterhooks.

But it’s not just the US government. Figures this week show total US household debt rose by $US148 billion in the first quarter of 2023, to a total of $US17.05 trillion.

This is the first time in history that total US household debt has crossed $US17 trillion.

A breakdown of the large categories:

• Mortgage debt: +$US121 billion to $US12.04 trillion.

• Car loans: +$US10 billion to $US1.56 trillion.

• Student loans (sort of their version of HECS): +$US9 billion to $US1.6 trillion.

• Credit card debt: Unchanged at $US986 billion.

In short, US consumers have run out of money and are using debt to "fight" inflation.

Property round-up… taking longer to sell, first home buyers returning, rents continue up, but vacancies rising 

I thought it would be easier, and clearer, to stick all of this week’s property data in a snappy summary.

First of all, while property prices continue to rebound, particularly in Sydney and Melbourne, the number of listings is increasing and the time it takes to sell is blowing out.

Meanwhile, the rental crisis continues, but there some tentative signs of relief as national residential property rental vacancy rates continued to rise to 1.2 per cent in April 2023 – the third consecutive monthly rise in rental vacancies.

According to SQM Research, rental vacancy rates in Sydney and Melbourne rose to 1.4 per cent and 1.2 per cent respectively. Brisbane, Perth and Hobart recorded rises to 1 per cent, 0.6 per cent and 1.6 per cent respectively – the number of rental vacancies in Hobart has now tripled since the all-time lows recorded in April 2022.

Rental vacancy rates in the Sydney CBD, Melbourne CBD and Brisbane CBD also increased rapidly.

Even though rental vacancies are rising, rents are still exploding. Over the past 30 days to 12 May, capital city asking rents rose 0.4 per cent, that’s up 20.7 per cent for the year.

Capital city house rents rose by 0.1 per cent for the past 30 days and 17.7 per cent over the year. Apartment rents have risen by 0.7 per cent for the past 30 days and 24.2 per cent for the past 12 months.

The most expensive rent is for Sydney houses at $963 a week and the most affordable rent is Adelaide units at $414 a week.

Despite rising interest rates, the explosion in rents is seeing first home buyers starting to get back into the market.

Leading the charge is New South Wales. The number of first home buyers has been increasing since the start of the year, coinciding almost exactly with the market recovery which also started in January. South Australia is also seeing strong increases with the number back to where they were mid-last year.

The Budget measures announced last week provided additional help for first home buyers with the extension of the First Home Buyer Guarantee.

Nervous sharemarkets

I have to say there is a real sense of nervousness about the performance of sharemarkets over the next couple of months.

A couple of factors are playing on the minds of the share gurus:

•  The fear of last year’s June share rout playing out again with tax loss selling.

• The debt ceiling and regional banking crisis in the US crunching markets.

• The uncertain future of interest rates – have they peaked, is there further to go, when will rate cuts begin?

And when there is uncertainty, markets start to focus on warning signs, both in terms of news and on the charts.

Mathan Somasundaram from Deep Data Analytics posted this chart of the ASX 200 showing a “head and shoulders” pattern, which is a precursor to a significant drop in sharemarkets.

And then the charting website, Game of Trades, showed this chart of the US S&P500 index with a pattern mirroring the 2008 market crash.

The S&P 500 is up nearly 7.5 per cent this year, but roughly 70 per cent of that gain has been driven by the 10 largest stocks in the index. And that top 10 is dominated by tech companies.

In fact, the five largest are Apple, Microsoft, Alphabet, Amazon and Nvidia. Apple and Microsoft alone make up 14 per cent of the index.

Société Générale said in a note this week that without the big gains for AI-related stocks Nvidia, Alphabet and Microsoft, the S&P 500 would actually be negative this year.

Stock (or ETF) of the Week: BetaShares Australian Equities Strong Bear Hedge Fund

If you’re nervous about the sharemarket crashing over the next few months you can do a couple of things to protect your portfolio:

• Sell stocks and increase cash levels. But this has be assessed by taking into account the tax consequences.

• Organise an options strategy which takes advantage of a falling market.

• Likewise, use a futures market strategy which shorts the market.

One of the less complicated options, and often less expensive, is to invest in an ETF designed to profit from a falling market. They do this through a range of options and financial engineering strategies.

One of the biggest in this area is the BetaShares Australian Equities Strong Bear Hedge Fund, which has a portfolio where for every $1 the sharemarket falls, it goes up by $2.50.

This ETF came up on my sharemarket show The Call (www.ausbiz.com.au midday-1pm) this week with Henry Jennings from Marcus Today and Andrew Wielandt from DP Wealth Advisory.

Both agreed this ETF provided good protection against a falling market for those who wanted some “insurance” for their portfolio.

But they warned this is not a “set and forget” investment. You put this ETF in place when markets have started to fall and investors are gloomy. But it should be closed quickly when markets turn.