Without doubt the 2008-2009 bear market has been savage and most investors have seen their investment portfolios take a battering. This year has been particularly unnerving as the Australian stock market looked like it may fall below 3000 just some weeks ago and we were heading for levels not seen since the last bear market. But just as all bull markets come to an end so do bear markets, and so I cannot help wondering if the rally since the lows of March (Ides of March?) mean we are already in the next bull market phase?
One of the tricky aspects about investing in the stock market for many people is that the market can start to recover in the middle of a recession. As I have mentioned before this is because investors are focused on the future prospects of a company, so even though sales might be down if investors can see light at the end of the economic tunnel they will start to look for bargains. The question is now if the rally we are experiencing will turn into the next bull market run, or if it is what some analysts call a “suckers rally”.
My personal view is that we have seen the lows of this bear market and although we will see further corrections (as we always do every year) we are now in the early stages of another bull market. This does not mean every stock is a winner and some companies may not survive the recession, but I reckon now is a good time to be in stocks. (actually I have never been out of stocks)
As I mentioned last year, I have been a cautious buyer of shares ever since the market fell below 4800. After the failure of Lehman Brothers in September last year my resolve was tested but I kept selectively buying small parcels of stocks in what I thought were quality companies. Finally I am starting to hope my strategy will pay off although I was getting pretty nervous in March when the market looked like it could fall through the 3000 level.
So what is making me feel a little more confident? Well the key reasons for my renewed optimism are:
- The relationship between the QBE stock price and the ASX All Ordinaries Index (see: QBE and the ASX All Ordinaries – are they back in sync? has been restored. This suggests to me that the chaos caused by the failure of Lehman Brothers is now behind us and we are back to the days when mainly market fundamentals are driving the market.
- The appetite for risk is beginning to return to global markets. It might be hard to believe but there are faint signs that investors are moving out of cash (and maybe even safe haven assets like gold) back into stocks and dare I even suggest it, property. According to the Nikkei Weekly (May 4th) individual investors in Japan are returning to stocks and that “excessive pessimism is now abating with the emergence of signs that the global economic downturn is coming to end end”.
- The Australia dollar has slowly been gaining against the Japanese Yen now for some weeks. Back in February the Australian dollar was buying around a paltry 55.5 JPY, today it would get you around 73 JPY. This indicates to me that Yen is slowly heading back into Australia looking for higher yields/returns.
- The Baltic Dry Index is off its lows. (Although it does not signs a a major recovery at this stage.)
- The government has finally woken up! As I mentioned in August 2008 (see: What we need for a sustained stock market rally ) we needed Rudd and Co. to wake up and take steps to help Australian businesses and drop the planned Emissions Trading Scheme (ETS), which is nothing more than a tax anyway. It appears that finally the Rudd Government has backed down and will delay the introduction of the ETS; which is curious since the Prime Minister told us that global warming was such a threat to the nation that swift action had to be taken. I guess there is only two conclusions we can draw from delay in implementing an ETS: one is that the Government is not quite as concerned about global warming as it was just weeks ago or the second is that Kevin Rudd has saved the planet! Maybe congratulations are in order Prime Minster..now you just have world peace to sort out, make sure you get the quality of meals you deserve and find a cure for the common cold.
- Our key trading partners appear to be stabilising. Although the Chinese economy is off the boil it appears that actions by the government are holding up the domestic economy. In Japan there are tentative signs that the worst may be over and in the U.S. some analysts are saying the bear market is dead and that even the housing market has bottomed. I would not say that the economies in any of these three nations were robust at the moment but the flow of bad news is slowing and some positive trends are beginning to emerge.
So there are reasons for stock market investors to be a little more optimistic this month than last month, but there is no guarantee that the current rally we are enjoying will not be snuffed out by a further shock to the financial system or some geopolitical issue.
All I can say is that my reading of the tea leaves is telling me the worst is over, but I have been wrong before (and will be wrong again) so I welcome other views regarding where the market is heading or comments on what indicators investors should be watching.