Why some markets deserved a clobbering, Aus unemployment rate out at 11:30am, ASX futures down 91 points

The post-GFC interest rate environment in the US, coupled with the falls in value of the US dollar up until 18 months ago, provided manufacturers, exporters and investment banks there with the potential for significant lifts in their earnings. This luxurious corporate environment took its first blow when the US dollar began moving higher in mid-2014, its second blow when interest rate markets adjusted for the US Federal Reserve's tighter interest rate schedule in 2015 and its third blow as oil prices have continued falling--let's remember that the net imports of oil and gas into the US plummeted between 2005-2015, so the benefit of a falling oil price has shrunk commensurately--and as a result the earnings contraction at an index level has caused markets there to adjust to lower forward estimates. With a bit of fear thrown in to fuel falls, markets in the US are now at levels that will prove more attractive to conservative investors (a phenomenon certainly not present in 2007). The biggest fall in expected earnings at an index level has been in the tech sector, where the NASDAQ's trailing 12-months price/earnings multiple of 21.11 meets a forward estimate of 16.96. As far as forward earnings estimates go, the S&P 500 and Dow Jones Industrial Average are at the respectable levels of 15.31 and 14.12, which compare favourably with Australia's ASX 200 at 15.33.

Disciplined value investors sometimes have to sit patiently in high levels of cash while waiting for a time when more opportunities emerge to enter stocks at attractive prices. It is the prospective ushering in of this era that will see the end to a traders' market, which is what I would describe the last six months as. But there is a mini collapse going in among oil producers (as opposed to refiners) in the US, and the implosion of an oil and gas sector that has absolutely boomed in the last 10 years (1000% plus in US shale gas production for example) is going to be felt in that country. 2015 was a year where 20-30% production increases were on the cards for US oil producers, so these falls are a big deal there. 2015 was the year that the US was to become the world's largest producer of oil. So should these aggressive falls in oil prices matter to the US economy? Yes, absolutely. But we're copping headwinds for no great fundamental reason apart from softer investor sentiment, and at 11:30am this morning (Sydney time) we'll see whether an expected 5.9% unemployment rate gives us even more reason to invest with comfort.

Today's first chart shows the percentage moves since October 2011 in the NASDAQ (blue), S&P 500 (black) and ASX 200 (orange). The grey line is the US dollar index, which arrived in chorus with lower oil prices and you can see this has helped flatten out the rising trend in equity markets. The second chart shows WTI crude oil and Brent crude oil prices over the last 18 months.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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