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Can the stock market rally continue?

June 2nd, 2009 · Greg Atkinson · 5 Comments

After enduring over a year of falling stock prices we are finally seeing some tentative signs that the stock market is coming back to life. The lows of March 2009 now seem almost a distant memory and as the world’s markets continue to rally more bullish commentators come out of the closet and a few bearish ones crawl into one. But does the current stock market rally have legs?

Before I even attempt to tackle that question let’s get the current rally into perspective. It might sound good when expressed as percentage, but we are coming off a low base and are still over 40% down from the peak reached in November 2007. (doesn’t that seem a long time ago!) So although I tend to be an optimist this does not mean my head is always in the clouds; we still have a long way to go before we could say the stock market has recovered.

To fully appreciate where we are now in terms of the current rally let’s have a look at where we have been over the last two years.

ASX All Ordinaries 2 Year Chart (June 09) – Key Events

asx-all-ordinaries-2-years-june-09.gif

  1. In August 2007 the market was spooked by some rumours about the state of the Chinese economy. In hindsight this was a warning that the markets were primed for a major fall, but the stocks recovered and all seemed fine.
  2. In November 2007 the ASX All Ordinaries crept past 6800 and the Rudd Government was elected.  Unemployment was at historic lows, the commodities boom was in full swing and the future appeared bright indeed.
  3. By late December 2007 the stock market  had corrected down to around the 6300 level but panic had not set in yet. After all it is not uncommon to have an end of year market correction. The sub-prime crisis was an issue but it seemed it might be isolated to the U.S.
  4. By mid March 2008 it  seemed the stock market may have found a bottom at around 5200 and in the following weeks the All Ords rallied towards 6000.
  5. During May 2008 the markets started getting very nervous about the fall out from the sub-prime crisis. Oil prices were high and heading to US$200 a barrel according to some experts, Wayne Swan handed down a deflationary budget in order to fight inflation and the RBA was still raising interest rates. By the end of May the markets were heading lower.
  6. From July to the end of September it appeared once again that the market had found a bottom. Since the market had fallen by more than 25% and this was around the average drop in previous bear markets, I concluded during this period that indeed the bottom had been reached at around 4800. But then Lehman Brothers failed!
  7. The shock to the global financial system as a result of the failure of Lehman Brothers was severe. Suddenly not only was there talk of a severe recession in the U.S. but another depression appeared to many to be a very real possibility. Panic set into the markets and the All Ords plunged below 4000, stabilised for a while then fell again. In November 2008 Barrack Obama won the U.S Presidential election.
  8. On the 6th Match 2009 the ASX All Ordinaries closed at 3117 and on the 9th hit an inter-day low of 3052. It seemed the 3000 level would be breached and the tech chartists were busy predicting further falls.
  9. Today the 2nd June 2009 the ASX All Ordinaries closed at 3948 and the market has been on an upward trend since the 9th/10th March. It appears that finally a market bottom has been reached and perhaps the Australian stock market can begin the slow process of recovery.

As of today the Australian stock market is at around the same level as it was back in October 2008 just after the Lehman Brothers failure sent markets around the world spiralling downwards.  So the next level I am looking for is back where I thought the market should have fallen to prior to the failure of Lehman Brothers, i.e around 4800.

The ASX All Ordinaries chart above also highlights that 2008 was all downhill for stocks and that the Australian stock market was in decline basically from December 2007 all the way until March 2009. It has only been recently that this decline has been reversed and the current rally is the only major rally we have had since March 2008. (it has been a long time between drinks as they say!)

So can this current rally continue? Of course it can, and if the news out China remains positive and the news out of the U.S. does not get worse, then I fully expect  stocks to push higher over the next few months. Of course there will be corrections as investors take profits or react to bad news, but even in the good years there are corrections.

However this does not mean the path ahead for investors is risk free. Some companies will still fail, the downturn in economic activity will hurt company profits and returns from stocks may be weak for most of 2009.  But at least there is light finally at the end of the tunnel!


5 responses so far ↓

  • 1 Gary // Jun 6, 2009 at 5:44 pm

    Well the All Ords has broken through 4000 but maybe this is far as the rally goes for a while? There still seems a long way to go before the U.S. economy looks healthy again and can China keep holding up?

  • 2 Senator13 // Jun 10, 2009 at 5:21 pm

    All Ords broke through the 4000 mark again today. It looks like it is holding up at least in the short term. Could this just be good sentiment over the short term or is there something more fundamental about this rally?

  • 3 Greg Atkinson // Jun 12, 2009 at 8:03 am

    Senator – none of us can say for sure how the rally will go, but it would seem reasonable that we could get back to the pre-Lehman Brothers debacle level of around 4800. I would guess that the market is going to be held back by the falls in the iron ore and coal prices but if investors can see that the global economy is really starting to recover, then they might just move back into stocks anyway.

  • 4 Ned S // Jun 12, 2009 at 10:46 am

    One advantage to not being in cash (regardless of the various risks of the alternatives) is that inflation would seen to be taking hold in Oz. And the RBA looks like it is going to ignore that until it suits them not too. Apparently, in relation to stagflation, a Treasury bod has recently stated: “We are masters of our own inflation rate, we have a floating exchange rate” (see below):

    http://news.brisbanetimes.com.au/breaking-news-business/global-stagflation-unlikely-treasury-20090603-bv1g.html

    But whenever any of the powers that be, feel to say they are “masters” of something, I get a bit concerned. And probably even more so when it is a relatively minor global economic player like Oz.

  • 5 Greg Atkinson // Jun 12, 2009 at 7:11 pm

    Ned S – I always get worried when the Government starts to meddle. You can almost see how things will play out in slow motion..the Government will spend like crazy, the debt will pile up and then we will end up with a tax review that ends up ripping more money from our hands to pay for a lot of wasteful vote buying projects. As it is now people will eventually have to wait until age 67 to get a pension so that Gillard can run around the country opening new classrooms or so Rudd can build a broadband network that could have been funded entirely by the private sector.

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