Markets
Local:
The ASX200 index had a slight gain over February rising by 0.79%.
Global:
The S&P 500 was up 5.3% in February with a 2nd straight quarter of Y/Y growth.
The Dow Jones Industrial Average was also up 2.5% over the month.
The STOXX 600 has risen nearly 4% so far this year, after a near 13% jump in 2023 on growing bets of imminent rate cuts.
Gold:
The price of gold traded at $2,047.71 USD per ounce, as of 29th February. That’s down 0.90% from the beginning of the year.
Iron Ore:
Iron Ore price continued to fall after another sluggish month in February to finish at $117.50 USD/Mt.
Oil:
Brent Oil price has continued to remain steady in recent times, closing out February 2024 at $81.91 USD/bbl.
Property
Housing:
Housing values posted a broad-based rise in February with CoreLogic’s national Home Value Index (HVI) up 0.6% in February.
The 20 basis point acceleration from the 0.4% increase seen in January was the strongest monthly gain since October last year. Each of the capital cities and rest-of-state regions recorded a lift in values over the month, except Hobart where the market fell -0.3%.
“Housing values have been more than resilient in the face of high interest rates and cost of living pressures,” CoreLogic’s research director, Tim Lawless, said. “The ongoing rise in housing values reflects a persistent imbalance between supply and demand which varies in magnitude across our cities and regions.”
Economy
Interest Rates:
Australians will need to wait to find out how their interest rates might change in March. The RBA has historically delivered news about interest rates on the first Tuesday of each month (except January), but central bankers will meet just eight times this year, meaning the next meeting is on March 18. Fewer meetings will bring the RBA in line with how other central banks operate, as the US Fed and the Bank of England also only meet eight times a year.
Retail Sales:
Australian retail turnover rose 1.1% (seasonally adjusted) in January 2024, this follows a fall of 2.1% in December 2023 and a rise of 1.5% in November 2023. Ben Dorber, ABS head of retail statistics, said: “The rebound in January follows a sharp fall in December when consumers pulled back on spending after taking advantage of Black Friday sales in November. Retail turnover is now back at a similar level to September 2023.
Bond Yields:
Australia’s 10-year government bond yield was subdued around 4.1% as investors digested softer-than-expected domestic inflation figures.
The yield on the US 10-year government bond sat at 4.25% at the end of February 2024.
Digital Currencies:
After a flat January, Bitcoin and Ethereum logged respective gains of 45.9% and 44.2% in February, spurred by ETF inflows and ahead of March’s Bitcoin halving event.
Exchange Rate:
The Aussie dollar barely moved in February against both the American dollar at $0.652, and the Euro at $0.602.
Inflation:
Australia: The monthly Consumer Price Index (CPI) indicator rose 3.4% in the 12 months to January 2024. The most significant contributors to the January annual increase were Housing (+4.6%), Food and non-alcoholic beverages (+4.4%), Alcohol and tobacco (+6.7%) and Insurance and financial services (+8.2%). Partially offsetting the annual increase is Recreation and culture (-1.7%) primarily due to Holiday travel and accommodation (-7.1%).
USA: The consumer price index, a key inflation gauge, rose 3.1% in January relative to a year earlier, down from 3.4% in December. Inflation has fallen significantly from its pandemic-era peak 9.1%, in June 2022. Around that time, the average consumer’s paycheck wasn’t keeping up with fast-rising prices. Their so-called “real earnings” — earnings after accounting for inflation — were negative for more than two years.
EU: Euro area annual inflation is expected to be 2.6% in February 2024, down from 2.8% in January according to a flash estimate from Eurostat. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in February (4.0%, compared with 5.6% in January), followed by services (3.9%, compared with 4.0% in January), non-energy industrial goods (1.6%, compared with 2.0% in January) and energy (-3.7%, compared with -6.1% in January).
Consumer Confidence:
The Westpac Melbourne Institute Consumer Sentiment Index rose 6.2% to 86 in February, from 81 in January. This is the biggest monthly gain since April last year, when the RBA paused its rapid series of interest rate rises and takes the Index to its highest level since June 2022.
Employment:
Australia: The seasonally adjusted unemployment rate stood at 4.1% in January 2024, slightly higher than the December 2023 reading of 3.8%. The participation rate decreased to 66.8% from 67% in the same period.
USA: Total nonfarm payroll employment rose by 353,000 in January, and the unemployment rate remained at 3.7%. Job gains occurred in professional and business services, health care, retail trade, and social assistance. Employment declined in the mining, quarrying, and oil and gas extraction industry.
Purchasing Managers Index:
The Judo Bank Australia Manufacturing PMI for February 2024 was revised higher to 47.8 from the preliminary figure of 47.7, indicating a continued slowdown in the sector following a one-off rebound in January. Output, new orders, and employment reached cyclical lows, signifying a soft phase in the manufacturing industry at the outset of 2024. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.
US Services PMI:
The S&P Global US Services PMI eased to 51.3 in February of 2024 from 52.5 in the earlier month, missing market expectations of 52, according to preliminary estimates. Albeit at a slower pace, the result pointed to 13 consecutive months of expansion in the US private services sector, pointing to some resilience from the Federal Reserve’s prolonged restrictive policy.
US Global Manufacturing PMI:
The S&P Global US Manufacturing PMI was revised upward to 52.2 in February 2024, surpassing a preliminary estimate of 51.5 and January’s 50.7. This latest reading indicated the swiftest expansion in the country’s manufacturing sector since July 2022, with output rising the most since May 2022 and total new orders growing at the strongest pace in 21 months.
Adviser Numbers:
Current adviser numbers sit at 15,644, the net change for the 2024 calendar year is +30, with the net change for the financial YTD sitting at +87.
Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS, Wealth Data.
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Is Nvidia the Best Stock on the Market?
Nvidia (NVDA) has done it again. For the third straight quarterly period, the company blew past management’s own revenue guidance by more than $2 billion. The technology company is the clear leader in advancing the many uses of artificial intelligence (AI).
For Nvidia’s fiscal 2024 fourth quarter ended Jan. 28, the company reported sales of $22.1 billion. That’s an increase of 265% versus the same period a year ago, and well above the prior guidance of $20 billion.
Last year marked an explosion in sales for the data centre segment that includes advanced AI chips. Three of Nvidia’s four business segments increased revenue year over year in its fourth quarter, with automotive being the only laggard. But the data centre segment is the focus right now. Data centre revenue was more than 400% higher than the prior year period.
The company believes that escalation will continue as management believes total sales will be about $24 billion in the current quarter. These are also high margin products. In its full fiscal year 2024, gross profit margin expanded to almost 73% compared to just 57% in fiscal 2023. That’s expected to continue to rise to more than 76% in the current fiscal 2025 first quarter.
The stock hit a record high of $746.11/share in February 2024 and is currently trading near $682 in the premarket. The stock is prone to big moves both up and down after reporting earnings.
Nvidia price to earnings (P/E) ratio is 80, which is around 3.5x the S&P 500 and somewhat “normal” for big cap tech growth stocks. The company has managed to grow its earnings and revenue by triple digits in each of the past two quarters on a year-over-year basis. Looking forward, the company is expected to enjoy some wild growth over the next few years. On an annual basis, earnings are expected to grow from $3.34/share in 2023 to $11.45 in 2024, to $20.03 in 2025! That makes Nvidia one of the fastest growing mega cap stocks in the market! Elsewhere, the return on equity (ROE) has grown from the low 30’s a few quarters ago to over 84% in the most recent quarter.
The Tech Stock Boom
For years, Meta Platforms (META), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) were consistently among the highest-growth stocks in the market—they were collectively known by the acronym FAANG.
Unfortunately, FAANG stocks have lost their bite in recent times, and several of them have even changed their names. Market commentators and tech investors have coined a new acronym for the top five mega-cap tech stocks: MAMAA.
Apple, Microsoft, Alphabet and Amazon represent the four largest S&P 500 components by market cap, and each stock has a market cap of more than $1 trillion
The five MAMAA stocks have a combined market cap of more than $6.6 trillion. As of September 2022, the S&P 500’s total market cap was about $30.1 trillion, meaning these five stocks alone accounted for nearly 22% of the entire index’s weighting.
The newly dubbed magnificent 7 which includes the AI giant Nvidia dominates the NASDAQ index with the combined market cap weighting sitting at nearly 50%.
The ‘magnificent’ run seen by these stocks saw a return of 106% in 2023, doubling the Nasdaq 100’s nearly 54% gain and significantly outperforming the S&P 500’s 24% gain over the same period.
The Magnificent 7 of 2023 have now become 2024’s Magnificent 3: Nvidia, Meta and Amazon. Of these, Nvidia’s saw a stellar start to the year as shares have gained nearly 60% YTD due to the GPU leader’s beat-and-raise quarters.
If these cycle leaders start underperforming, it usually marks the start of a trend change. The M7 stocks have undoubtedly led this bull run since 2023. We are now looking for what will lead the market next, and more importantly, when.
Sources: AFR, Forbes, Statista
The Reformed Stage 3 Tax Cuts – How do They Really Affect Us?
The stage three tax cuts are the third phase of changes to income taxation legislated by the Morrison government in 2019, with support from the then opposition Labor party (despite its reservations).
The tax cuts framed by the former Coalition government were mainly designed to offset the impact of ‘bracket creep’, when rising incomes push workers into the next tax bracket, forcing them to pay a higher proportion of income tax despite no change to their real income due to inflationary pressures.
Changes to the Stage 3 Tax Cuts
While the overall cost of stage-three remains the same, the Albanese government has scaled back tax cuts for those on higher incomes in favour of low and middle-income earners.
The biggest change compared to the original plan is that the 37% tax rate is retained, albeit with a higher upper limit of $190,000. In return, the two lowest brackets at which tax is paid have also been reduced.
The decision is seen as controversial and politically-risky for the government because Labor had pledged to keep the legislated tax cuts unchanged ahead of the 2022 election and had reiterated its commitment since.
However, after announcing the U-turn, Albanese argued he was willing to break a key election promise, based on the changed economic reality confronting many Australians at the start of 2024 and that the changes will deliver cost-of-living relief for low and middle-income earners.
Australia’s inflation eased to 4.1% in the December quarter after peaking around 8% in 2022. Most recently, monthly CPI is now at 3.4% for the year to January 2024, according to the latest ABS data.
The government said the original tax-cuts plan was designed five years ago, before the pandemic, as well as prior to the global inflation spike and interest rate increases that have resulted in economic uncertainty and the spectre of recession.
The Opposing View
The article by Paul Kelly in the Australian (Now for the personal income tax explosion) highlights many of the problems the tax cuts will and have already created for many Australians. We have highlighted a few of the important takes below.
- The 2023 Intergenerational Report, prepared by Treasury, stated that personal income tax will boom from contributing a record 50.5% of total tax receipts in 2022-23 to reach 58.4% in 2062-63. That trajectory reveals the power of the trend.
- The IGR report, looking at the next 10 years, said personal income taxes equated with 11.7% of GDP in 2022-23 but are projected to increase to 13.5% within the decade – a hefty lift in a relatively short time. The political time bomb is ticking.
- Our excessive reliance on personal income tax is colliding with demography and nothing will halt the march of demography, with the IGR saying the personal income tax base will “continue to narrow in line with the projected decline in workforce participation”. There are now four people working for every person over the age of 65 years and this will fall to 2.7 people at 2060.
- Comparing data from the national accounts and looking at the two-year period (September quarter 2021 to September quarter 2023), Judo Bank chief economic adviser Warren Hogan said: “Income taxes have been a bigger drain on household disposable income than have interest payments.”
- Hogan’s analysis shows income tax paid by households rose from $65.1bn in September 2021 to a whopping $91bn two years later, an astonishing increase that drives the budget bottom line recovery and derives from bracket creep, high migration and a strong labour market. The real surge has come in the last 12 months, from $73.7bn to $91bn, September to September 2023. By comparison, mortgage interest payments increased from $11.2bn to $29.7bn across the same September quarters comparison, 2021 to 2023. While in percentage terms the mortgage payment increase is higher, the dollar value of the increase in income tax is far larger. Hogan said: “There has been a misconception that this was all the fault of the Reserve Bank and that has suited the government”.
- Bracket creep has had a bigger impact on middle-income Australia than the RBA’s interest rate rises. “There will be arguments that bracket creep is not the only factor driving higher income taxes – promotions and a growing labour force – but I think this is clutching at straws. At the moment we have an excessive reliance on income tax, on personal income tax in particular, and an extreme reliance on the top 20 per cent of income earners. “Labor’s tax revamp will invite truckloads more analysis of the flaws in our tax system”.
- One answer is to index the rate scale; but the politicians hate that idea. They prefer what we do now – periodically cut taxes, cynically brag about making people better off, but merely preside over increasing the personal income tax burden, and hope upon hope to avert the big smash inherent in a system that needs large-scale reform.
Whether you agree or disagree with the viewpoints highlighted above, the question of whether our current tax system is really fit for purpose is ambiguous to say the least. This is an area that will continue to be debated and may struggle to change as long as short-termism in party politics continues.