Our daily dose of business news appears universally bad, the global economy seems to be in a free fall and yet many investors are looking for signs of life and a stock market rally. Is it possible the next bull market could start in 2009, and could we see the Australian stock market stage a significant recovery this year?
Most investors have to make some assumptions about the future. After all if you buy a stock you have already assumed that you will get a future return on your investment, so it is logical for investors to keep looking ahead to try and forecast (guess) how their portfolios might perform. The important point to note is most stock market investors are looking ahead and this means they are keenly looking for signs of life in the global economy, so that they can get into positions ready for an stock market rally.
As I have mentioned before this generally means stock markets tend to rise before the economy improves and as we have seen recently, they also fall before the economy starts to starts to show signs of stress. (As you might recall in early 2008 stocks had already fallen by more than 20% from their 2007 highs and yet the RBA was still fighting inflation in the real economy!)
Back in August 2008 (see: What we need for a sustained stock market rally) I outlined a number of areas where we needed to see an improvement before we could expect a sustained Australian stock market rally
and now six months later we can refer back to those areas and see if we might be closer to a rally friendly environment.
Triggers for a long term stock market rally
1. The Reserve Bank of Australia (RBA) starts to cut interest rates.
Finally we have seen decisive action on this front however the Reserve Bank of Australian board should be explaining why they did not meet in January 2009 and cut rates again then. I am guessing we are in for another rate cut and hopefully that should be about the last one needed. A lot of economists are expressing the view that the RBA has done a good job in handling the current economic crisis, however I strongly disagree and believe we need to look at the make up of the RBA board. The current composition of the board makes it a textbook recipe for “groupthink” outcomes.
2. Oil drops to around $100.
Well oil fell below $100 and then kept falling. My feeling is that oil is now trading at a price that is too low and a that trading range of between $60-80 will be reached this year. I am personally fairly bullish on oil as demand will return eventually and so having a few quality oil related stocks in your portfolio is likely to be a good strategy over the long term.
3. The government wakes up.
Back in August 2008 I wrote:
“The Prime Minister (Teflon Man) and the Treasurer (Fluffy Duck) spent the early part of the year saying how bad the economy was and talking up inflation. This done a good job of pushing down consumer and business confidence in the economy and so they have now checked their job descriptions and realized they are suppose to be helping not making things worse. (maybe they thought they were still in Opposition) Now they are running around trying to repair the damage and nobody is allowed to mention the “R” word. (is the “R” for recession or rookies I wonder?) Hopefully they will focus on measures to stimulate the economy like cutting corporate taxes and not kill demand further by rushing in a carbon emissions trading plan.”
Sadly it took the Rudd Government nearly six months to spring into action. (apart from the vote buying handouts before Christmas) How anyone in Australian can honestly think that Rudd and Swan are doing a good job as economic managers amazes me but I guess a lot of it has to do with that juicy $42 billion economic stimulus package now in the pipeline. Of course a number of business leaders support the package, just follow the money trail and you will see why.The main concern now is that government has been caught off guard and has now panicked, as a result the nation will be plunged into debt we the taxpayers we not get anywhere near our $42 billion dollars worth.
Floods in some parts of Australia and devastating bush fires in other parts. Australia is truly a country of climate extremes. Sadly for our rural sector 2009 is not shaping up to be a great year and with the fall in prices paid for most soft commodities a turn around for this sector of the economy is probably not going to take shape until 2010 at the earliest.
5. A U.S Recovery
Back in August there was plenty of talk that the U.S might avoid a recession, however now the data out of the U.S ranges from bad to just plain terrible. The economists and analysts who use to spruik on about a “decoupled” global economy are hiding behind the water cooler and as the U.S. slides, it seems to take most other economies with it. However we might just see some signs of life emerge in the U.S. economy over the next 6 months and this could support our stock market. I guess we just have to wait and see if the Obama economic stimulus package can start to slowly turn the U.S economy around.
6. Some good news! (Or maybe the end of the bad news)
Believe it or not there is some good news out there. President Obama’s $838 billion dollar economic stimulus plan is likely to get the green light and so that will give the U.S economy a boost even if some of the money is wasted. I am not saying it is a great plan, but if the Americans want to throw money around who am I to argue. Also the Baltic Dry Index apparently is creeping back up and this might indicate that the global economy, dare I say it, is finding a bottom.
So it appears we might be closer to seeing a rally than we were six months ago. That is good news on one hand, but there are still a number of areas of concern (namely U.S. consumer demand and the slowing of the Chinese economy) that make me nervous. I am also surprised that the Australian stock market (All Ords/ASX 200) is still below 4000 and certainly my suggestion last year that the market bottom was around 4800 was a dud call.
All we can do now is to try and look through the current bad news and look for signs of life in the economy, because they may indicate that a sustained stock market rally is heading our way.