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When might the ASX All Ords pass the last bull market high?

July 25th, 2011 · Greg Atkinson · 24 Comments

The Australian stock market is still a long way below the last market high reached in 2007 and so I can’t help wondering when we might see the ASX All Ordinaries reach a new market high.  Perhaps it will just be a few years time before the market recovers lost ground, or maybe it’s going to be a long wait before share market investors see stocks once again post gains year after year.

To try and estimate when the market might once again be at or near the high of 2007 let’s look at the long term chart of the ASX All Ords (XAO) and see how the bull markets played out.

ASX All Ordinaries Index: 1988 – 2011


To keep things simple I am going to round off numbers and start off by using 6500 as market high in 2007.  (although the All Ords did in fact peak at 6779) The precise numbers are not important since I am going to be looking at approximate long trends only.

The last bull market ran from 2002/3 until 2007 and in that time the All Ords Index moved from around 3000 up to 6500.  This means on average the All Ords rose an impressive 700 points every year and it’s easy to spot how steep that rise was by looking at the red line I have drawn on the chart above.

At the time the consensus view was that the Australian stock market (and indeed most major global markets) were rising because of an unprecedented expansion of the world economy.  The only way is up baby was the consensus view at the time and although a few people were warning of a bubble, the fact is that there are always people warning of economic or market bubbles so you can’t blame investors for sticking with the trend.

With the benefit of hindsight the Australian stock market bubble is easy to spot. We also got warning about the impending slump when the market fell back in early 2007 but as they say, nobody rings a bell at the top of a bull market so investors big and small were caught out when the stock market rout struck.

On the chart I have also drawn a couple of very rough long term trend-lines.  The blue line is the conservative long term trend and the green line represents a more optimistic view of the long term trend of the All Ords. As you can see the Australian stock market for better or for worse is now simply trading pretty much in-line with the long term trend so perhaps we should not be surprised.

ASX All Ordinaries Technical Chart: 1988 -2011


The long term candlestick chart for the All Ords shows two pretty distinct trends. The one between 1991 and 2001 is pretty closely aligned with the overall long term trend whereas the last bull market trend between 2002/3-2007 was something we had not see before.

So the question is..which trend will the market follow when it (hopefully) makes a move back towards 6500?

If the market continues to move upwards as per the long term trend then we have quite some years to go before we see the 6500 level breached.   My guesstimate is that if the long term trend were to continue then we will not be near the 2007 high again until around 2020.  (i.e based on the All Ords climbing on average 200 points a year)

Of course the market may rally more strongly than the long term trend suggests or may even fall back again, so we need to appreciate that looking at charts and drawing lines on them is not a reliable way to forecast what will happen in the future.

If the Australian stock market finds it’s mojo again and was able to gain 700 points or so a year then we could pass the 2007 high in 2013-2014.  Either way it would appear likely that we will have to wait years before we can crawl our way back to where we were in 2007.

Finally let’s quickly have a look at the All Ords chart over the last 10 years.

ASX All Ordinaries Index 10 year chart


On this chart I have drawn a line at the 5000 level as this seems to be above which the stock market bubble formed and which now acts like ceiling on the market.

From around the start of 2003 until the start if 2011 the All Ords moved from around 3000 up to around 5000 which on average is a gain of around 250 points a year. If this trend were to continue it would be another 6 years before we were near 6500 again give or take a year or so.

Of course none of this chart gazing provides us with any certainty regarding how the Australian stock market will perform over the next few years or even next decade.  But I will be foolish enough to draw a few conclusions.

Firstly I think the chances of the market surging up past 6500 over the next few years are very slim and I seriously doubt it will happen.  Secondly I doubt that we will see another 2002/3-2007 surge during the next bull market and finally, I think as share market investors we should prepare ourselves that when the market does enter a steady climb upwards again, that is likely to be at best a touch above the long term trend but not spectacularly above that trend.

So in summary my view at the moment is we will not be near the 2007 stock market high again until around 2014-2016 and that is the best crystal ball gazing I can do for now.  I would not call this a forecast as such, but simply a mental note to prevent myself being carried away by any short term rallies.

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

24 responses so far ↓

  • 1 Biker // Jul 25, 2011 at 1:38 pm

    August 2 should give us an indicator… ! 🙂

    Reluctant as I am to offer financial counselling to offspring clearly more intelligent than their dad, I’ve advised both my kids to pull all their global indexed funds out for a week or so.

    Meanwhile we’re enjoying the wonderful Ozbuck enough to have just booked an Alaskan cruise. Swore we’d never submit, but how could you knock back a 50% + 8.33% reduction in price????!

    Hell, we can’t drive a _hire car_ for that kinda deal!!~ 😀

  • 2 Jimbo Jones // Jul 25, 2011 at 4:19 pm

    Ive already posted my thoughts on your previous thread of when we will hit all time highs. But 3 points:

    1. If you can go back the last 50 years and have a look at timings it gives you a clue to the Long Term markets progress.
    2. The past 20 years have seen financial companies weigh the index. Expect over the next few years this will change.
    3. The All ords will need to fall into a Gold/All Ord ratio of around 1 for a period of time.

    happy trading

  • 3 Greg Atkinson // Jul 25, 2011 at 6:03 pm

    Hi Jimbo – your comment on the previous thread actually prompted me to think more deeply about when we might be able to get our heads back above water again.

    Your statement: “Expect the 2007 peak to likely be breached by around 2015-2017. That will be part of a larger bull cycle taking us up to around the 10,000-12,000 points level.”

    …seems to be pretty much aligned with my view that the market may creep back up near 6500 between 2014-2016.

    What I am not brave enough to do at this stage is to pick how high the next bull market will take the All Ords although your estimate of 10,000 – 12,000 points seems quite reasonable to me.

  • 4 Jimbo Jones // Jul 25, 2011 at 6:55 pm

    Thanks Greg. It was a good article.

    Yes it was only till a few weeks ago that i started looking into when we really could truly break the all time top. It does seem we are sitting in a washpool of some significant structural changes that need time to move through the economy.

    As much as people say shares are cheap, inflation is rising within Austraila and this generally pulls earnings multiples down to the bear market lows of 6x-7x. (we currently sit at 12x-14x).

    I also recently started researching the gold to All ords ratio and generally this needs to fall to about 1:1 to indicate the bottom of the bear market. we currently sit at around 3:1 vs 8:1 in the 2007 peak. This would mean either 1) Gold will rise to around $4500-$5000/oz or further if the All Ords index moves up again (or a combination of both!!!) With a perfect storm growing across the financial system, it is more likely that gold price hikes will bring this ratio back to a bear market low.

    But yes – my 10,000-12,000 point call is very much back of the envelop numbers. I daresay – towards the end of the decade, we will have suffered significant inflation resulting in a decade of higher interest rates and big wage increases. This will finally have washed the debt levels down to a level where the next secular bull market in equities will be able to commence once again!

  • 5 Stillgotshoeson // Jul 25, 2011 at 8:50 pm

    Last year on the DRA site in response to a comment by Ross on Deflation/Inflation First questions.. I stated in that thread that I would not be surprised to see the DOW go 14000 or 15000 on next high. I also stated that I was not tipping this, just that I would not be surprised to see it.

    I feel confident that the US congress will vote to raise the ceiling, and will continue to do so. The problem will never be congress, the problem will be when other countries decide that US notes are no longer wanted.

    10000 to 12000 call is not outlandish at all Jimbo.

  • 6 Greg Atkinson // Jul 25, 2011 at 9:01 pm

    The last bull market we went from around 3000 to around 6700..or in other words the All Ords went up 2.3x.

    So if we say the next bull market launches from say 3500 that would get us up to around 8000 and if it launched from say 4500 that would get us up to 10,350. So I reckon Jimbo’s call makes a lot of sense. (and I will make a note of it!)

  • 7 Stillgotshoeson // Jul 25, 2011 at 10:34 pm

    I think the DOW and ASX will test new lows before this is over Greg.

    I am thinking sub 3000 on ASX and sub 5000 on the DOW.. Whilst the markets fell quite a bit last time, I don’t really think we saw capitulation of the markets, I feel this is yet to come, time frame, best guestimate. Within 5 years.

    My target Gold price is $2400USD ($3000AUD) These may prove to be a tad conservative. Still optimistic for Australias future. Just a rough waters to try and sail through as best we can.

    Avoid debt as much as possible in the short term, have some cash and do your best to keep an income coming in.

  • 8 Ned S // Jul 25, 2011 at 11:00 pm

    Off topic but might be of interest to some anyway:

    “Prognosis: I think pressure is rising for some kind of debt-ceiling fix that Congress will pass by Aug. 2 or so. This won’t do anything about the looming downgrade of U.S. debt. It will simply kick the crisis from August into the fall. Anybody think Congress will come up with a deficit reduction plans then, if it couldn’t in July? (Hint: Every month closer to the 2012 election increases the temptation to play politics with the budget.) I think the U.S. faces an almost certain downgrade in the fall if there is no deficit reduction plan by Aug. 2.

    Effect for investors: In the short run, I don’t think it pays to radically redesign your portfolio to avoid the effects of a failure to raise the debt ceiling by Aug. 2. I would make sure I had enough cash on hand — and that means outside of a money market fund — to get me through any panicky reaction in the markets. If the Aug. 2 deadline passes and the following week doesn’t bring catastrophe, you can expect to see some investors unwinding their end-of-the-world hedges. Gold, for example, might retreat. Thus, this would be the time to look for bargains to add to your portfolio in preparation for a potential downgrade in the U.S. credit rating in the fall. Expect to see worry start to ratchet up again then.

    Investing strategy: Participate in any “euro crisis is over” rally in the ways that I’ve suggested above, but get ready for a return of the market’s risk-on attitude in September and October. Don’t get overextended in any rally, and look to take profits when the rally starts to look like it’s getting tired.

    In other words, what I’m advising now is that the risk/reward ratio is tilted toward reward over the next few weeks, because the odds are that European politicians will hammer out the details of their response to the Greek crisis and that either Congress will raise the debt ceiling or that failure to do so won’t be immediate financial Armageddon.

    I’m also advising that the risk/reward ratio will tilt back toward risk in the fall as the markets start to worry that they can’t quantify the effects of a downgrade from AAA for the United States. As I said in my July 18 column, I think financial Armageddon is a low-odds possibility, but the financial market for things like repo agreements is sufficiently opaque that I can’t guarantee disaster won’t strike. Neither can Wall Street, which is what will make the markets so nervous in the fall if there is no August budget deal.”

  • 9 Greg Atkinson // Jul 25, 2011 at 11:25 pm

    Stillgotshoeson I think with so much up in the air right now that it would hard for anyone to say that there was no chance the stock market lows would not be tested again. Personally I think we are already at the low end of the trading range and that the low struck in early 2009 was the market capitulation phase.

    But who can say for sure? Imagine what would happen if the Chinese economy hit the skids and mining stocks starting to tumble?

    I agree with you that now is not the time to be racking up debt. I can’t imagine margin loans for stock portfolios are great sellers at the moment. The banks don’t even seem to be pushing them these days.

    Ned, thanks for the link. I am not sure if that cheered me up or not 🙂

  • 10 Jimbo Jones // Jul 26, 2011 at 8:31 am

    Stillgotshoeson – A DOW below 5000 points or ASX sub 3000 won’t happen. GDP is growing strongly around the world (as much as the media would like us to think otherwise). And you need to build in the effect of inflation into your forecasts. Australia is currently running 3%p.a +. The US is pushing higher rates and the UK is starting to have a signficant inflation problem (4.5% + and building).

    Unlike the great depression when GDP halved over the 1930’s, we are still growing and at a decent clip.

    The likely outcome for the DOW will be once it hits this cyclical market high (probably closer to the technical resistance of the past 10 years) it will likely shed about 1/2 of all this bull markets gains. i.e Bottom 7000. Top say 14000. The resutling correction is likely to be about 3500 points. So taking us to a new bear market low of around 10,000-11,000 points. (Again, im back of the enevlope type numbers – but expect the upcoming DOW correction to be about 25-30%. NOT another GFC type outcome.

    As for the Aussie market, unfortunately the near term is difficult to forecast. I’d say we are close to a bottom, with all the bad news in the media, but with a high AUD and increasing, we still might find we underperform the global markets for a while yet. Which does make it a difficult trading environment.

    On the US Debt default – I don’t think it is actually possible the US can default, because the Fed reserve will simply restart the bond purchasing programme – effectively monetising their debt. Even still, the debt ceiling may prove that they have to start to cut spending.

    But yes, there is a good chance they will loose their AAA rating. but the rating is meaningless, as the Bond Yields are forward looking.

  • 11 Ned S // Jul 26, 2011 at 10:59 am

    Another view Greg:

    “Bottom Line – The bull market in stocks will continue to lead the Inflation Mega-trend. The Sovereign Debt Crisis Induced Market Volatility such as that afforded by the US Debt ceiling failure default would present Great Buying Opportunities into primarily U.S. and Emerging Market stocks, commodities and UK Internationals, and presumably likewise for other International European stocks. Remember September 2008 and how you could have made a killing out of a crisis by bargain basement buying, in which respect always keep a shopping list of stocks then when others panic – BUY! Though my expectations are that a major panic does not look likely, so your debt crisis buying opportunity looks to have come and gone during mid June.”

    Oz stocks? A simple minded take might be that as our interest rate is high(ish) and the AUD is strong(ish) – from the global perspective anyway – Aussies aren’t feeling the compulsion to invest in our stock market in the ways that others are in theirs. And re foreigners investing in Oz stocks – the risks may well be perceived as quite high – given the negative talk about China – As I reckon foreigners speculating in Oz stocks saw something like 70% of their on paper capital vanish in the 2008/09 crash given the combined effect of the 54% (?) drop in our stock prices and the 30% odd drop in the AUD – with that being a difficult lesson to forget in a hurry I’d say?

  • 12 Jimbo Jones // Jul 26, 2011 at 11:10 am

    Ned S – That seems true.

    I look at the next 10 years as:
    1. Higher Interest = Higher Deposit Rates. Less funds for the market
    2. High AUD = Structural Change means a repricing of our stocks into a depreciated USD
    3. Baby Boomers = Lots of cash lost during the GFC. So will be cautious of bringing in new money to the equity markets especially as they retire. They are asset rich and will likely to be a net seller (that includes property as well) to fund their current lifestyles in an ever inflationary environment. On a side issue, i suspect we will start seeing more baby boomer homes and investment properties being brought onto market to fund there retirement int he next 10 years.
    4. Political Environment Australia: Not the best at the moment.

  • 13 Stillgotshoeson // Jul 26, 2011 at 12:00 pm

    “Over 55’s Communities” are becoming very popular here in Melbourne, with Boomers selling the family home and moving into a smaller unit in a community of their peers

  • 14 Ned S // Jul 26, 2011 at 12:14 pm

    The demographics strike me as a huge issue Jimbo – Throughout all the developed nations. They don’t get talked about a lot though. One of those “too big/too hard” types of issues perhaps?

    Like you, I’m in the inflationist camp. Though don’t know enough about it to argue the point with anyone.

    But again, put together the Boomer and Gen X demographics (there’s as many and more Gen X as Boomers in Oz by birth year) we are looking at a very long term effect playing out as they all retire that in itself should be fundamentally deflationary for asset prices though inflationary for lots of goods and services I’d say.

    It’s not an attractive prospect at all from either an investor’s or a retiree’s point of view.

  • 15 Ned S // Jul 26, 2011 at 12:51 pm

    ““Over 55?s Communities” are becoming very popular here in Melbourne, with Boomers selling the family home and moving into a smaller unit in a community of their peers”

    I’d be curious to know what they are doing with the bulk of whatever cash difference they get Shoes – Is it going into bank deposits or into stocks? (I personally doubt much would be going into IPs) … Bank deposits would be MY gut guess???

    One thing that Oz stocks pretty obviously do have going for them though, is that they get regular and ongoing injections through our complulsory super scheme. Wouldn’t mind seeing some long term modelling on when/if the drawdowns by retirees might start to significantly offset those inflows. So yes, I fully agree with Jimbo that long term, the retirement demographics are a huge factor in it all.

  • 16 Biker // Jul 26, 2011 at 3:17 pm

    Jimbo: “On a side issue, i suspect we will start seeing more baby boomer homes and investment properties being brought onto market to fund there retirement int he next 10 years…”

    As BBs we’ve witnessed this several times in WA already.
    Examples vary:

    Case A: Sale of family home $1.25 mil, purchase of $600K home. Funds to Super/Cash.

    Case B: Sale of one investment home, kept main home; bought rural holiday home (Unsure of figures).

    Case C: Sale of rural family home on acreage, purchase of city home; funds to Super/Cash (Unsure of figures).

    Note that in _none_ of these cases shares were purchased, although the Case C couple hold considerable blue chip holdings, primarily banks and miners.

    Ned, I found this part of your quote quite interesting:
    “I don’t think it pays to radically redesign your portfolio to avoid the effects of a failure to raise the debt ceiling by Aug. 2.”

    My sons share that view. However my MIL confided last night that her fund manager had just phoned her to ask if he should sell her international shares. She said YES. I’ve no idea on what basis she made that decision. At 84, she may figure a defensive move is wise.

    Neither of my sons is bailing… .

  • 17 Ned S // Jul 26, 2011 at 5:25 pm

    It’s a curious one where the most bearish of the bears seem to be wrting off the possibility of the US not raising its debt ceiling as a bit of political grandstanding Biker, while the more moderate and even somewhat naturally bullish analysts are saying this is possible; And asking what might the consequences be.

    But I’m so fond of my capital/risk averse that (like your mum in law) I’d be in cash rather than stocks at this time “just in case” – But being as risk averse as me isn’t what’s required to be a successful investor either. So I’d certainly not advise most to do what I do! 🙂

    PS: While I’m pretty sure you and Shoes and Greg all know my basic situation, for Jimbo’s general info I’m about 50/50 cash and Oz housing – With no debt and have had no stock market exposure since around 2005.

    PPS: Interesting to hear where your boomer associates have been putting the proceeds of their housing sales. It pretty much accords with what I suspected. (Though I doubt it’s putting smiles on their financial advisors’ dials.)

  • 18 Jimbo Jones // Jul 26, 2011 at 5:32 pm

    Yes, it does seem that savings have broken out of its downward trajectory since the mid 1980’s. I expect it to remain around this level for some along time.

    On another point;
    If you compare the performance of the ASX 200 in USDollars vs the SPX 500 (the US key index), you will see the ASX 200 has performed even stronger than the SPX 500 due to the currency.

    Like the beginning of the 1980’s when the AUD began a strong downward trend against the USD, the ALL Ordinaries had one of the best bull market runs of all time.

    A likely scenario going forward will be a bull market running in the US, followed by a significantly depreciating AUD will result in a very strong bull market.

    Unfortantely, as i have said previously, i don’t believe the stars will align for the Austrailan equity market at least for another 4-5 years. I anticipate the AUD will appreciate against the USD over this time and the lack of new funds being invested in equities (as mentioned above). (hopefully i am wrong – because i enjoy trading strong bull markets)

    It will be a decade of higher yields in both stocks and property and lower earning multiple valuations for both.

  • 19 Ned S // Jul 27, 2011 at 11:00 am

    In terms of Greg’s original topic question on when the All Ords might pass its bull market high, I just hesitate to suggest a date – The demographic issues simply make my long term view too fundamentally bearish. Could well be a mental block type of thing where it causes me to not see the bigger picture? For me it’s almost like the demographic issues of the developed nations are the big picture going forward maybe?

    Additionally, I’ve not seen any analyst say that they think the issues that were fundamental to the GFC have been resolved. Or even that they look like being resolved? So we continue to be in what another blogger elsewhere commonly calls “extend and pretend” mode. And the imminent expectation of some sort of GFC Mark II remains high.

    Of course the other view is that from the Oz perspective at least, Asian growth is the big picture. With the developed nations continuing to limp along in “extend and pretend” mode – For decades if necessary?!? Could certainly happen? But it stretches my imagination a bit to think that it will is all.

    So back to the original question – If the wheels fall off and we see lower lows before we see higher highs going forward, then we are facing a very real problem for multiple decades I’d suggest. Unless the powers-that-be do come up with some genuine ‘fixes’. (Though I’m not sure that I’ll personally like any genuine fixes – My suspicion is that they’ll be strongly inflationary. And will knock the value of cash holdings about very badly!)

  • 20 Stillgotshoeson // Jul 27, 2011 at 11:46 am

    All ords is round figures 50% off of either of these.. new high or new low and either outcome is possible depending on the actions of certain governments and reactions to those said actions.

    As I have discussed with Ross on DRA, I think we are on the edge of both.. which one first is the million dollar question.

    I think we will see both events prior to 2017, still tending to go with an inflationary run up sooner than later before it all falls over again, GFC II will be a long time coming out of.

  • 21 Ned S // Jul 27, 2011 at 5:47 pm

    To me on one level, it seems pretty much inconceivable (as in it’s just too hard for ME to get my tiny mind around) how the markets could retest the March 2009 lows Shoes. But I surely think it’s possible – As long term, I just keep coming back to the thought that the demographics of the entire developed world going forward simply don’t support any growth other than that which is of the artificial inflation induced quantiative easing type.

  • 22 Lachlan // Jul 29, 2011 at 8:26 am

    The debt ceiling charade will be over soon now the usual clueless people screaming for resolution in fear of crisis have been trotted out by media. Dow will rally toward 14000. ASX200 will plod the same slow road under weight of carry in to AUDs. Eventually 5000 will be broken and left behind for the old highs after 5700 taken out but slowly she goes.

    AUD gold is squeezed close to the end of a powerful multi year pennant. It’s as good a predictive tool as any. Major currency/economic event before year end. AUD gold to 2000K plus.

  • 23 Lachlan // Jul 29, 2011 at 8:35 am

    I think Glenn Stevens has pushed this interest rate thing too hard. Much inflation is cost push from increased government expenses translating to higher charges on consumers. There are no extra cashed up consumers chasing goods (like bananas, what a joke). Double whammy for them. Then I’m guessing Glenn just has to do what he’s told.

  • 24 Greg Atkinson // Jul 29, 2011 at 9:36 am

    Lachlan I agree that the RBA has gone too hard with the interest rate rises. If commodities prices rise then this will tend to drive up inflation, when the RBA raises interest rates this just causes more hardship all round. Seems to me that Central Banks around the world have not been that effective over the last 10 years or so and have simply stumbled though each economic challenge they face.

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