Why the Australian share market is headed higher

During 2018 it looked like the All Ords would actually reach its elusive all-time high of 6,873.2 points, having begun the year at 6,167 and peaking in August, following a positive month on both Wall Street and the ASX.

But, the political turmoil in Canberra spooked investors and the All Ords lost $30 billion in the week to 23 August.

Adding to the situation were poor sessions on Wall Street that saw US shares sold off heavily ahead of the start of the earnings season.

Meanwhile investors in Australia locked in gains as they watched the ASX drop alarmingly through October and November.

The market came to a bleak end in 2018 – closing the year out at 5,709 on 31 December 2018.

Since then, the Australian share market has been actively recovering from the volatility and unpredictability it encountered last year.

All Ords Rod North XAO ASX 7000 points chart
The All Ords index is closing in on the 7000 mark, currently sitting at 6928.3 points.

Finally, after almost 12 years, the Australian share market is finally hitting its stride having, this week, pushed past its all-time intra-day high of 6,873.2 set on 1 November 2007, closing at 6,928.3 on Tuesday after an intra-day high of 6,959.

Out with the old, in with the new

In the 143-year history (since 1875) of the Australian share market, after every boom there has been an inevitable bust.

Some of these busts, as in the 1987 share market crash, saw the market decline by up to 50% in a very short timeframe.

In the 1987 crash, it was virtually an overnight drop that took the market by complete surprise.

Other crashes took longer, like in November 2007, it took until March 2009 for the market to hit its bottom.

The one thing that history does tell us, however, is that after every boom and bust, the market has always worked its way back to its previous high and then surpassed it.

Speaking with Small Caps, respected investment analyst and market commentator Rod North explained that the old norms of the nature of the cyclical market have been rewritten for the 21st century thanks to the information age and the power of the digital age, and both lacklustre and controversial country leadership on a local and world-scale.

“On a close analysis of the last 100 years of the share market performance, it can generally take between five to seven years to get to the boom phase of the cycle,” he said.

“This means that after the 2009/10 GFC, when the All Ords sunk to a low of 3,109 points, it’s taken almost five years longer than in any other market cycle to circle round and reach the boom phase of the cycle again.”

The only way is up

With the market currently going gangbusters, Mr North said that there have been enough positive economic indicators over the last six months to expect the All Ords would surpass the all-time market high of 6,873.

He also believes that there is enough anecdotal evidence to suggest that the All Ords will reach 7,000 points, and beyond, by the end of the year.

“We know that there are certain signs to look for that indicate we are in boom phase of the investment clock cycle, which, in turn, suggests the All Ords Index is set to rise to even loftier heights. And if we were in any doubt, the past six months have made it abundantly clear that we are now in the boom phase of the investment clock,” Mr North said.

Investment Clock Rod North
Rod North believes we are at 10:30 on the investment clock.

“During the boom phase of the investment clock, along with lowering interest rates, the sown seeds of the recovery give rising and sustainable earnings, share prices rise as unemployment falls, commodities prices continue to increase, overseas reserves are rebuilt and property investment remains an attractive investment opportunity given gains achieved from share market investment,” he explained.

“With the RBA recently lowering the cash rate by 25 basis points consecutively, from 1.50% down to 1%, and with the cash rate likely to go lower, the share market will be a major beneficiary as investors chase yield,” he added.

Commenting on last year’s situation, Mr North noted that investors had been jittery due to the Banking Royal Commission and the country’s political uncertainty.

“However, investors are clearly feeling confident now that the local political and economic landscape is free of major volatility. Remember, the market never likes uncertainty.”

Only a tweet away

Keeping international volatility in check, Mr North suggests now that President Donald Trump has officially launched his 2020 re-election campaign, it seems most likely that it will be in his best interests to negotiate a trade deal with China and look to stabilise the key economies and markets around the world.

“This will help to keep his voters confident is his ability to maintain a strong local economy, with low unemployment, low interest rates and a positive outlook for the US share market.”

“The question that the Trump camp will inevitably ask voters is, are you better off today under my presidency than you were four years ago? If the answer to this is clearly, ‘Yes’ you can probably count on that vote for the Republicans and the resulting re-election of Trump for a second term of office in the White House.”

Mr North told Small Caps that it also seems most likely that now that the 31 October Brexit deadline will be met now that Boris Johnson has been elected as the new UK Prime Minister.

However, Mr North warned, “nothing is certain in today’s unpredictable international political climate, with the risk of a “Captain’s call”, sending markets into a flurry of chaos and volatility, only ever being a Tweet away.”

Keep your head while those around you lose theirs

Mr North said now was the time to be “extremely cautious”.

“At some point, as we gain further momentum and finally reach the mature stage of the boom phase, we will  then enter the greed’ cycle and that never ends well,” he noted.

“Remember that earnings, earnings, earnings will always drive share prices up.”

“As we advance further into the boom phase, don’t listen to advice on shares from the taxi or Uber driver, the tennis coach or the conversation at a dinner party. Often these amateur share tipsters are providing you with information that’s like a stick of gelignite with the fuse lit and set to explode at some point,” Mr North explained.

“You just never know how long or short the fuse might be.”

Filip is the founder of Small Caps and has written in both Australia and abroad covering the global economy, geopolitical issues, commodities and stocks. He also has many years experience as a share market trader and investor.