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What we need for a sustained stock market rally.

August 7th, 2008 · Greg Atkinson · No Comments

Rather than focus how bad things are at the moment let’s focus on what could turn things around. To do that as far as our stock portfolios are concerned, I suggest we look at what factors could trigger a long term stock market rally.

1. The Reserve Bank of Australia (RBA) starts to cut interest rates.

Back in March this year (“Are we near the bottom”) I wrote that the RBA would start cutting rates this year and I recall sharing this view with some market commentators who strongly disagreed…now of course many commentators are saying rate cuts are imminent. Already the market is expecting a cut and this has given a little help to many stocks and when the cuts do start, we should see some upward pressure on the market. Exporting companies or companies generating a lot of revenue from outside Australia will do well as the Australian dollar will fall and thus these companies will get a boost to their bottom lines. Watch the Yen grow stronger this year against the Australian dollar as the Japanese pull their money out of Australian dollar investments.

2. Oil drops to around $100.

I am a convert to the Peak Demand theory as outlined by GaveKal and have felt for some time oil would get down to below $100 a barrel. A few months ago this view seemed ludicrous but now maybe I am looking a little more sane. If oil can get down to around $100 and stay there then this will be a big help to the Australian economy and take some of the inflationary pressure out of the economy. This will help wake up the RBA and thus we should see further rate cuts. A combination of falling oil prices and rate cuts would be a lovely boost for a battered stock market.

3. The government wakes up.

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 did a good job of pushing down consumer and business confidence in the economy but they have now checked their job descriptions and realised they are suppose to be helping the economy, 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.

4. Rain!

Droughts are not good for any country but for Australian they are really bad news for the economy. A sustained period of good rainfall and increased agricultural output would boost export earnings and help keep food prices in check.

5. A US recovery.

As anyone who watches the market lately realises, our stock market has been even more sensitive recently to economic news out of the U.S. A sustained rally on the Dow Jones and news that the U.S. has avoided recession (and this seems likely) will give the Australian stock market a boost. We have already seen what a rally in the US can do to our market over the last few days.

and finally:

6. Some good news!

Or maybe the end of the bad news…in any case this would help drive a rally on the market. Remember when people buy stocks they are buying into the future, i.e. you buy a stock because you think the company will do well in the years ahead or do better than it is now. The market tends to move ahead of the economy meaning that it heads down because a recession is feared long before the data comes through confirming there was or is a recession. Conversely the market will move up when it is felt the economic cycle will begin to improve. When the bad news starts to slow and some good news emerges, especially from the U.S., then we will see the market respond positively. Forget all that rubbish about the world’s economies being decoupled, we are more coupled than ever!

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Of course we need commodity prices to stabilise as any bubble is bad and they all lead to pain one day! (remember to say “Bubble is Bad” a few times a day)

So if you keep your eye on the points I have mentioned above you will be able to get a feel for how the market will respond. Remember geopolitical issues (and rogue traders) can throw everything into turmoil so there is no such thing as a guaranteed rally..so please tread carefully!


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