Australian stock market hits record high but economy still flaky

Records are made to be broken but it has taken the Australian share market a seriously long time to reach a new high.

Technically, it has not even made it quite yet with the ASX 200 stopping just 10 points short of the all-time high on Thursday before sliding slightly on Friday.

The broader all ordinaries index cracked the 11-and-a-half-year record though, after trading above 6900 points on Thursday.

Compared to many overseas markets Australia has been a real laggard, with the US market quickly surpassing its pre-GFC record before scaling fresh heights until now it is almost double its pre-GFC high.

That Wall Street boom has literally dragged us up to where we are today, with the inevitable caveat that it will feel free to drop us back down at any time it runs out of steam.

We’ve come a long way

In economic terms, there are plenty of differences between where Australia finds itself now compared to when the last record was set in in November 2007, just under a year before the collapse of Lehman Brothers really ushered in the Global Financial Crisis in September 2008.

At the time the share market record was set things were going swimmingly in the Australian economy but there were cracks appearing in the United States as boom time home lending started to go sour as loans started to go bad, threatening highly rated collateralised debt obligations.

As we all remember so well, after a terrific boom on a share market, the GFC that followed on so closely became a terrible time to own shares as markets fell precipitously and many world economies fell straight into recession.

Banks froze up, confidence evaporated and governments had to step in and guarantee bank deposits to avoid a total banking collapse.

Australia avoids recession – will it do it again?

Here in Australia we narrowly avoided going into recession through a happy combination of a massive China stimulus feeding into our mineral exports and a massive direct cash injection to taxpayers from the Rudd Government keeping household consumer spending ticking over.

Shovel ready infrastructure spending was also pushed much higher to keep employment on the rise.

This time around, the Australian economy is extraordinarily weak, even as the share market pushes on to record highs.

We may not be in recession at this stage but we are not far off it, with only immigration pushing economic growth into a positive figure of around rate of just 1.2%.

If we measure growth in per-capita terms we are already in a mild recession.

Unemployment is low by normal standards but has got the Reserve Bank so worried that it has cut official interest rates to just 1%, with a promise of lower rates to come if employment doesn’t keep improving.

Australia’s export performance is fortunately going gangbusters thanks in part to high iron ore prices but things may be as good as they get as Chinese growth continues to slow and trade tensions between China and the US keep the rest of the world on tenterhooks and a slow growth path.

Lower rates, the US and expanding multiples push up market

So how has Australia’s share market still managed to break a long-term record despite insipid economic growth?

Well, as highlighted before part of the performance is due to Australia being dragged upwards by the US market.

As it soars higher, US investors look elsewhere to find cheaper shares and ours is one of those relatively cheaper markets.

Another factor is the downwards push on interest rates.

As the risk-free rate of return gets lower, the attraction of the dividend yields available on shares grow and price earnings ratios begin to expand.

That multiple expansion has been evident in the Australian market as investors who are fed up with tiny and shrinking yields on term deposits travel up the risk spectrum.

That has a global perspective too, with the US Federal Reserve expected to cut official interest rates in the next week and rates in Japan and Europe already extremely accommodative, pushing up asset prices such as shares.