At the start of this year I had a somewhat bearish view of how the Australian stock market would perform during 2011 but the slump over the last few months has caught me by surprise. Even stocks in the mining sector are being dragged down by global economic concerns at the moment and I don’t expect things to improve much this year.
In February when the ASX All Ords broke above 5000 many stock market bulls were predicting that it would finish the year at 5500 or slightly higher. Their reasoning was that the mining boom would continue and that this would keep the Australian economy growing despite the economic gloom in the U.S. and Europe.
In comparison my forecast in January that the ASX All Ords would end 2011 between 4800-5200 looked positively gloomy. Today with the ASX All Ords trading just above 4500 even my bearish outlook is starting to look like it wasn’t quite bearish enough.
ASX All Ordinaries Index 6 month chart
Despite some promising rallies during the year the Australian stock market is currently more than 300 points lower than where it was in January 2011. As we can see from the chart above the market has slumped since around mid-April but the reality is the market has never really looked strong for most of 2011.
An optimistic person may look at the chart above and reason that the All Ords could rally swiftly back up to 5000 just as it did after the slump on March. But my view is that the global economic outlook is gloomier today than it was in March and I believe that the chances of a quick rally back to near the 5000 level is unlikely.
Let’s have a look at a few stock price charts and see what has been happening.
Rio Tinto (ASX:RIO) 6 month stock price chart
The Rio Tinto share price chart is very similar to that of the ASX All Ords and once again we can see that the overall trend since the start of the year is downwards. As with the All Ords there have been some relief rallies and although I would expect to see some more of these over the next six months, I don’t feel they will be strong enough to give much joy to investors.
Despite all the hype surrounding the so-called commodities boom the reality is that mining socks like Rio Tinto are not rallying to new highs and this suggests to me that investors are not as confident about the outlook for the commodities sector as media reports would suggest.
If we look now at a banking stock we can see again basically the same sort of chart.
ANZ Bank (ASX:ANZ) 6 month stock price chart
Despite a strong rally early in the year the ANZ stock price has slid backwards over the last few months and also appears to be trending downwards along with the wider market. So with the mining and banking sectors both looking weak, perhaps we can find some joy in stocks exposed mainly to the domestic economy?
David Jones (ASX:DJS) 6 months stock price chart
It wasn’t that long ago that many wise media finance commentators were churning out opinion pieces about how the Australian economy would push ahead despite what the rest of the world was doing as long as China kept buying what we were selling.
According to those wise folk our domestic economy would be doing so well by now that the RBA would have been forced to raise rates another notch or two and consumers would be out and about merrily spending.
That line of reasoning did appear to hold up well for the first few months of 2011 but it’s pretty clear now with rates on hold and stocks like David Jones heading towards multi-year lows that the retail sector is in trouble.
Again we can see that the stock price for DJS is under pressure and currently trending downwards just like RIO, ANZ and the All Ords Index. All in all, it’s not a very pretty picture for stock market investors.
Finally let’s have a look at the big picture and see what the ASX All Ordinaries has done over the last 10 years.
ASX All Ordinaries Index (XAO) 10 year chart
I have marked on the chart above the 4500 level which as you can see was reached during the last bull market around mid 2005. Depressingly for long term investors this means that over the last 6 years the stock market has essentially gone nowhere.
We might yet still see a strong rally in the second half of 2011 but one thing is for sure, we are still a long way from the highs of 2007 and it looks like it will be a few more years at least, before we will see those levels again.
Meanwhile the Australian stock market slump looks set to continue for at least the next few weeks and we won’t be out of this slump until the ASX All Ordinaries Index rallies well above 5000 points.
Greg Atkinson is the editor of Shareswatch Australia, the Managing Director of Ohori Capital and a Director of Eco Marine Power. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp