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September ends, stocks dip but the bull market lives.

October 4th, 2009 · Greg Atkinson · 20 Comments

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.

asx-all-ordinaries-1-year-chart-oct-09

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

asx-all-ords-vs-sp-500-1-year-chart-oct-09

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..


20 responses so far ↓

  • 1 Anon // Oct 4, 2009 at 8:28 pm

    “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”.”

    Regarding these figures, they were actually worse than reported:
    http://econompicdata.blogspot.com/2009/10/unemployment-even-worse-than-headlines.html

    I have taken some insurance shorts recently just incase. My intuition is telling me we may have a substantial correction soon and it wont be soft. If i’m wrong (which I regularly am) I am predominately long to take advantage of higher prices in any event. I agree with your call about the market being higher than we are now at the end of the year.

    Please remember this is just for discussion. This isn’t advice. Always seek a qualified financial advisor who knows your circumstances when making decisions.

  • 2 Greg Atkinson // Oct 5, 2009 at 7:58 am

    Anon I thought we would have already had a montly correction of say 5% by now, maybe we are in the midst of one now? I like to see people coming in and taking profits because it actually helps to build confidence but I get worried if stocks appear to be just heading upwards. (or downwards for that matter)

    I have never really been into short selling since I am terrible at timing the market, I just use corrections as times to look at buying something I have had my eye on for a while.

  • 3 Senator13 // Oct 5, 2009 at 8:40 am

    Yes I do not think it would be a bad thing if we saw a bit of a correction around about now. People might be looking to take profits before christmas.

  • 4 Anon // Oct 5, 2009 at 9:36 am

    “I like to see people coming in and taking profits because it actually helps to build confidence but I get worried if stocks appear to be just heading upwards.”

    I do aswell ! But you make a good point that we are still 30% from the highs in 07.

    The thing that worries me is that alot of people are calling for a small correction and then a continuation upwards (me included). Thus my concern we may go further down than most expect.

    I thought I’d post the main part of that Unemployment Article link i posted:

    http://econompicdata.blogspot.com/2009/10/unemployment-even-worse-than-headlines.html

    “the headline 9.8% unemployment figure would have been even worse had the number of those ‘not in labor force’ not spiked (the unemployment rate is a measure of unemployment / labor force).”

    I wonder how much unemployment would be if we included all the people who have given up and gone out of the labor force.

  • 5 Anon // Oct 5, 2009 at 1:17 pm

    US Broader Total Unemployed closer to 17% if we include discouraged workers, part time workers who want to work full time, plus marginally attached workers.

    Chart:
    http://www.ritholtz.com/blog/wp-content/uploads/2009/10/U3-U6-10.02.09.png

    Truly shocking figures

  • 6 Greg Atkinson // Oct 5, 2009 at 2:54 pm

    Anon yes the U.S. economy is still not looking good. I wonder if Obama sometimes regrets running for President? It looks almost possible that he might only get one term…who would have thought that 6 months ago?

  • 7 Anon // Oct 5, 2009 at 3:11 pm

    I rkn you could be onto something. The first thing I noticed about Obama is he seems to be all talk no action. People are starting to wakeup to that.

  • 8 Senator13 // Oct 5, 2009 at 4:49 pm

    I actually thought that Obama would be experiencing what Rudd currently is experiencing and that he would have high popularity across the board for years after he got elected and that Rudd would be the one who had the wind taken out of his sails pretty quickly. Looks like it is actually the other way around… Obama is really struggling to gain support for his climate change strategy and his health care plan is extremely unpopular. He is also looking shaky on foreign policy and not being able to make up his mind on what he wants to do. Rudd on the other hand is still riding extremely high in the polls and does nothing wrong in the eyes of the public… I would have thought that Obama would have had the same long honeymoon period as Rudd given the state of the US when he took the job. They both seem to look to operate in the same way I wonder why such a big difference in approval ratings?

  • 9 Anon // Oct 5, 2009 at 5:31 pm

    I dont think there are any decent alternatives to Rudd atm. Perhaps thats why Rudds popularity isn’t waning? Why choose someone else who could be potentially worse.

  • 10 Ned S // Oct 5, 2009 at 5:34 pm

    Just maybe Americans are starting to feel they are in for difficult times mid term minimum Senator while Aussies aren’t seeing such hugely unpleasant shocks ahead.

  • 11 Ned S // Oct 5, 2009 at 6:06 pm

    Geez Anon, seriously, think around about your friends and family and neighbours – Half of them have to be capable of doing at least as good a job as Rudd surely? (Given his backup and support.) I despair 🙂 – It is almost as if the Oz political system is somehow predisposed to delivering us the mentally challenged or the morally challenged or the psychologically challenged as respresentatives.

  • 12 Anon // Oct 5, 2009 at 6:15 pm

    “It is almost as if the Oz political system is somehow predisposed to delivering us the mentally challenged or the morally challenged or the psychologically challenged as respresentatives.”

    I cant argue with that lol.
    The way I see it, you have the following:
    Rudd will buy his mother for a vote;
    Turnbull will sell his mother for a vote;
    and the Greens will go bankrupt for a vote.

    What do you do ?

  • 13 Ned S // Oct 5, 2009 at 6:36 pm

    I don’t really follow Oz politicians Anon – Anytime I’ve tried I’ve thought this person is a nut – And have experienced revulsion and backed off. (With the possible exception being Lindsay Tanner one of who’s comments I tripped over one day.) So I can’t comment on Tony Abbot – Except to say I think he is a Lib???

    What do you do? That could be worth exploring further. Because what we have is not working. When there really are lots of smart and decent people out there who could do the jobs. IMO?

  • 14 Greg Atkinson // Oct 5, 2009 at 7:08 pm

    Anon, as Ned knows I want to reform the entire political system 🙂 Some time ago in frustration I ranted on about my plans in: Bring back the toga and lose the House of Representatives!

    The problem seems to be that we don’t end up with too many of the best and brightest running the nation, just the shrewdest, sneakiest and scariest!

  • 15 Senator13 // Oct 5, 2009 at 7:32 pm

    If the whole Peter Dutton debacle is anything to go by – the entire system is a complete mess. And people wonder how talentless people end up running the nation. It is a bit of a joke.

  • 16 Ned S // Oct 5, 2009 at 7:52 pm

    As I said Senator, I really, really don’t follow it – Who is Dutton? Seriously I truly haven’t heard? And suspect I’ve missed nothing for the experience???

    He was aberrant in that he obviously wasn’t playing hide the sausage out of wedlock or I would have heard of course – Which is Oz politics I guess. And might mean it is a good idea for Oz politics to change?

    But the mob likes a circus with its bread as both Greg and history point out. 🙂 🙂 🙂

  • 17 Senator13 // Oct 5, 2009 at 9:17 pm

    Ned – You are right, you have not missed anything. Just more internal Liberal squabbling. But this latest nonsense basically proves we have a broken system.

    Dutton is the current shadow health minister. He was also Assistant Treasurer for years under Costello. So he has ministerial experience and he is still in his 30’s. Basically his current seat has turned into a Labor seat due to a redistribution so he will loose it. The Libs wanted to move him into another coalition held seat but due to their infighting he lost the pre-selection vote and is now without a seat.

    Forget Liberal or Labor and all that political stuff – it is just ridiculous that someone competent and experienced can’t stay in parliament and can be knocked off by someone with no experience because of a flawed selection process, bickering and infighting. How are we supposed to get the best people for the job with this kind of process? The Liberals have them self to blame for this particular mess. Why would anyone bother trying to get into parliament with this kind of stuff going on? This is why politicians have such a bad reputation.

    The real point here is that we have a government not being held to account and the best people for particular jobs are not in those jobs. As a nation we need a Government with the absolute very best people running the show. As a nation we need the very best people in opposition holding them to account and keeping them on track. Currently, I do not think either of these two things is happening.

    As far as a solution goes I really don’t have a clue… I look around at what other places have and ours seems to stack up pretty well. Probably the best out of a group of poor alternatives? Short of going back to Togas!

  • 18 Ned S // Oct 6, 2009 at 5:19 am

    Thanks Senator. The situation you describe is pretty strange alright. Even down at the most basic level it makes me ask why exactly would the electorate be silly enough to vote him out if he is good just because he happens to be a Lib in an electorate that has become Labor. The problems seem to be so much a part of the system that I ask if it just mightn’t be far better (and even quite acceptable) to do something crazy like use a lottery system to get our reps.

    Maybe all names of people over 30, of average IQ or higher, who don’t have a criminal record, and have passed some basic test for being mentally stable and lodged at least 5 tax returns on which they haven’t cheated too much could go into a hat and if your name comes out the job is yours – For six years with the first three years of the six being spent as an apprenticeship where you tag along behind the current encumbent learning the ropes so that when it is your three years for real you actually have some idea what you are doing. All backed up by a lengthy mandatory goal term for any rep found guilty of taking bribes.

    We can dream I suppose! 🙂

  • 19 Greg Atkinson // Oct 6, 2009 at 7:47 am

    Ned all the more reason to scrap the House of Reps at the Federal level, then we don’t end up with these stupid electoral boundary change issues.

  • 20 Ralph // Oct 7, 2009 at 3:37 pm

    Yep, the coalition is eating itself alive at the moment. It’s sad. It’s almost like they are having an all-in brawl but have forgotten that they are doing it in public with the nation watching on.

    But what’s interesting, though, is how quickly it all turns around. Just a few years back, the coalition were dominant, while the ALP looked like it was destined to stay in opposition forever. Swan looked like he couldn’t tell a debit from a credit before he got into power. Now he’s a polished reciter of party talking points and only looks moderately incompetent (as opposed to grossly incompetent). So the coalition probably have to lose the next election before they work themselves out enough to present a coherent pitch for election at the following election.

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