Well today the stock market correction that I mentioned was coming in February has certainly hit and the ASX All Ordinaries Index has fallen below the 5000 level yet again. Is this latest share market correction something Australian stock market investors should worry about, or is it simply an over-reaction to global events which will have little long term impact on stocks and shares?
For those readers who think I am simply jumping on the correction bandwagon I will refer to what I wrote on the 18th February when most mainstream media market watchers were giddily talking up the market after it has pushed through 5000.
In my post: Charts Review: All Ords, Telstra, Qantas, BHP & Woolworths I made this comment:
“At this stage I feel we are likely to see the market correct again soon and then start to move sideways again…”
So it will not surprise readers that my outlook for the Australian stock market over the next few months is that it will basically move sideways and we will once again get stuck in a fairly narrow trading range.
Remember I am not a market bear by nature and that during the darkest depths of the global financial crisis I consistently stated that the global financial system was not about to implode, paper money would not become worthless and that stocks would find a bottom and rally upwards again.
So why you may ask, do I sound increasingly bearish of late about the outlook for the Australian stock market?
Let’s have a look at the charts of the big four Australian banks and see what might be worrying me.
CBA vs ANZ, NAB and WBC – stock prices chart over 10 years
The chart above shows the stock price movements for the big four Australian banks – Commonwealth Bank of Australia (CBA), Australian New Zealand Banking Corporation (ANZ), National Australia Bank (NAB) and Westpac (WBC) over 10 years.
The most striking feature of this chart is that it highlights how poorly NAB has fared compared to the other three major banks even before the global financial crisis struck. Much of the under-performance of the NAB stock price stems from some costly attempts to expand overseas and a case of staff fraud related to foreign currency transactions in 2004. All in all, things have not panned out that well for NAB shareholders.
You can also see how the bank stocks initially bounced back very strongly after hitting their lows in late 2008/early 2009 but then have struggled since early 2010. This suggests that although the banks have been reporting huge profits recently, investors are remain cautious about their outlook over the short to medium term.
CBA vs ANZ, NAB and WBC – stock prices chart over 5 years
A look at the same bank stocks over just the last 5 years shows how the Commonwealth Bank has led the pack and despite the best efforts of the new team at NAB after 2004, it’s share price still under-performed the other major banks.
Again this chart shows the rally off the lows seen in late 2008/early 2009 and the rather subdued share price performance for all four banks over the last 12 months after a significant correction during the early part of 2010.
So despite Government guarantees covering deposits and a strong housing market, the big four banks have still been unable to hold above their pre-GFC levels with all but the CBA trading around prices seen in 2006 or lower.
Like I have said many times, if the Australian economy is truly booming then it seems strange that so few stocks are reflecting this. This worries me.
Finally let’s have a look the Australian All Ordinaries Index (XAO) versus the best performing major bank stock, CBA and the mining giant BHP Billiton.
Australian All Ordinaries Index versus CBA and BHP – 5 years chart
Quite clearly BHP (and many other mining stocks) have been the place to be for the last few years although stocks like CBA have also provided some healthy returns if investors were able to get in while prices was relatively low.
What concerns me about this chart is that shows how mining related stocks like BHP are propping up the ASX All Ordinaries. Certainly bank stocks like CBA, ANZ and WBC are also helping to support the Australian stock market to a lesser extent but without doubt, it’s the mining companies that have been responsible for most of the post financial crisis gains.
So from this point a few things could happen. Firstly the banks could rally and drive the market higher and if the miners head higher as well, then the ASX All Ords and ASX 200 would easily push past 5000 again.
Another possibility is that the miners will gently fall back but the stock market will move sideways as the banks slowly creep up over the next few months.
Lastly if commodities prices correct (which I expect they will at some point) then most mining stocks would see their stock prices fall. This would rattle investors and bank stocks would be sold off as well sending the ASX All Ords well below 4800 and probably down near 4600.
I expect the market to move sideways as I indicated earlier but as the year progresses I would not be surprised to see the market undergo a major correction as commodities prices come off the boil. I have been waiting for this correction for months and so if it doesn’t occur this year then obviously I have not been reading the tea leaves correctly.
So with attractive bank deposit interest rates on offer I am inclined to be a seller of stocks when they rally and not a buyer of stocks even during corrections, unless I spot a company whose stock appears considerably undervalued. At this point of time there are not many of these stocks around in my view.
Current geo-political events at this stage appear unlikely to have a long term impact on stocks, but they do highlight how nervous investors are and how willing they are to sell off holdings at the first sign of trouble. This suggests to me that we are unlikely to see a major stock market rally over the next few months and that the downside risks outweigh the upside risks.