Weekly Wrap by Pythagoras Investing: 14 June 2020

Oil had its first weekly decline in over a month, dragged down by the broader selloff. OPEC confirmed a continuation of supply cuts with “overproducing nations” forced to pull back production into the future.  This will stop the downward pressure on price which existed 6 weeks ago.

At the same time, we have the start of demand for oil products.  For example, U.S. gasoline demand picked up 5% in the first week of June, up about 350,000 barrels per day from a week earlier. Given aeroplanes have not really been flying, it is unsurprising that jet fuel demand is still a fraction of pre-pandemic levels (35% of pre-coronavirus levels).  We believe this demand will begin to grow.

Inventories of oil are high and U.S. shale producers continue to suffer even with current oil prices. With supply limited, as demand grows prices of oil are supported – and oil and gas stocks can continue to slowly grind up.

The move on the Australian stock market from 4450 to 6000 has been fast. Financial markets experience wobbles all the time – rarely moving in 1 direction for extended periods.  This period is no exception.

This week saw the markets take a little pause – which is normal and healthy.  There was little by way of new information to cause concern – some group think about the Federal Reserve statement appears to be the excuse needed to cause concern and then confirmation for concern.

Leading into year end, there will be tax selling which can cause prices to move and people position their portfolios for the new year – and to “balance the books”.

It is worth noting that a lot of people who have been investing in the past 2 months are new to the market.  Their experiences have been positive, until now.  This makes them less predictable.  More broadly, investors have proven this week how skittish they are with the current rally. 

There is no doubt that earnings are under pressure in 2020 and part of 2021.  Some companies will not survive, others are clearly well equipped to prosper.  It is an environment for careful stock picking – and remaining vigilant on when to buy and sell.  These are the times when it is great to have a mathematical way to decide when to invest.  We remain with our target of 6,800 for the ASX200 by February 2021.  This offers a return of 16% for the market from today’s level (Saturday).  

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