Well September passed rather uneventfully as far as the stock market was concerned although in the last few days, it has pulled back somewhat. However the overall trend is undoubtedly upwards and this looks like it will be maintained for the rest of the year. Despite plenty of gloomy views the bull market lives on, at least for now.
When the market started the rally in March many experts were quite vocal in calling it a “fools rally” and if you stayed on the sidelines, then you missed a great buying opportunity. I am not saying all this with the benefit of hindsight and as regular readers of this blog will know, I have maintained the view that the stock market would not fall into the abyss, but one day rise to rally again. In March for example (see: QBE and the ASX All Ordinaries – are they back in sync?) I wrote:
“I am starting to feel that the stock market is beginning to move in a more logical manner where stocks are judged on their individual merits and not merely sold off on rumours or by panicked sellers. This does not mean that there will not be further falls, but I am becoming more confident that we may be witnessing a bottom of this bear market and that within 2009 we may even see the next bull market take root.”
We are now without doubt in a bull market, it may turn out to be relatively short lived but the undeniable fact is that the Australian stock market has rallied almost 50% since it bottomed out just 6 months ago and the trend (despite some recent falls) is still very much upwards.
ASX All Ordinaries Index (XAO) 1 year chart.
What the movement in stocks is suggesting is that investors are becoming confident that we are emerging from the worst period of the global economic crisis. However it is useful to keep in mind that although stocks may have rallied, they are still down around 30% from the highs reached in 2007. The stock market would need to rally another approximately 50% before it pushed above 2007 levels again, so it hardly been a good time for most people’s stock portfolios over the last 2 years. (including my own)
But the future as always is uncertain and we have not as yet emerged from what I call the Economic Twilight Zone We will have periods in which the economic indicators appear to suggest that the global economic recovery is gaining momentum and at other times, it will appear we are heading for a double dip type recession.
For example the latest U.S. jobless data spooked the markets because the unemployment rate climbed to the highest level since 1983. For weeks the economic data coming out of the U.S. was mainly positive, but then bad news arrives and investors run for safety. This is how the markets will trade in the “Twilight Zone”.
Even though the Australian economy has fared much better than the U.S. economy our stock market has still ridden up and down along with the Dow Jones/S&P 500. This is because the stock market is an economic indicator but it is not in itself, a direct measure of how an economy is faring.
At the moment when I look at charts of the the All Ords, ASX 200, S&P 500 or Dow Jones I simply use them as a guide to how investors are feeling and at present, they indicate confidence is on the rise.
ASX All Ords (XAO) versus U.S. S&P 500 Index (sp500) 1 year chart
So here we are now in the last quarter of the year and what we can say without a doubt is that the global economy is in a better position than it was 6-12 months ago. It isn’t in great shape that is for sure and there are plenty of countries that will be paying off debt for a long time, but the big picture view has improved.
From where I am sitting in Japan I can see signs that indeed the worst has past. Unemployment looks like it has peaked (it has now actually dropped back to 5.5%), many companies are starting to become more upbeat and export levels are starting to slowly crawl out of a hole.
In October 2008 if you had suggested in a business meeting to expand operations into a new market then someone would have called the men in the little white coats and you would probably be in a cell now next to Sarah Connor. However 12 months later not only are companies expanding into new markets again but there is also renewed action in terms of corporate takeovers, mergers and acquisitions.
So what then for the 4th quarter? Well forecasting is a fool’s game but if I had to guess I would say that the Australian stock market will close higher at the end of the year than it is now. I don’t think the global outlook for growth is strong, but I do believe people are less fearful now than they were this time last year.
The United States might be the sick man of the G-20 but there are plenty of other countries ready to push ahead and eventually this should make up for the drop in U.S. consumption. Perhaps in years ahead we will look back and realise this crisis was a necessary adjustment to the global economy and instead of heralding in a period or global economic decline, it was actually the beginning of Asian economic dominance..