With a new financial year ahead, how are the stock market, property and general investment ‘planets’ lining up with the economy? Are we in for another market rally where we rocket ahead? Or are we set to end up like a shooting star?
Despite apparent evidence to the contrary, I have backed the optimistic scenario against the doomsday merchants, who have warned us that we were going to hell in a hand basket! (Where did that saying come from? And, anyway, who could fit into a hand basket?)
Not many expert commentators picked the slide in the stock market that, at its worst, tumbled over 50 per cent. My contention was that a sell-off of shares was overdue — our stock market increased four years in a row, recording better than 20 per cent gains! That was outrageous and couldn’t last. However, no one could have imagined what happened over 2008, and the biggest surprise was the fact that American authorities allowed Lehman Brothers to fail. The assumption was that it was “too big to fail” but when it did collapse, credit markets seized up. Banks did not trust each other, which meant they didn’t want to lend and, if they did, it was at high interest rates.
The credit crunch smashed businesses carrying too much debt, and short-sellers as well as wise guy investors took the market down, and a few companies with them.
Since early October, global governments have introduced stimulus packages to help their economies put their financial systems on more secure ground, and credit markets have started to de-crunch.
Interest rates have fallen and the famous VIX index or the ‘fear index’, which measures investor nervousness, has come down to 25.93, but in October was over 80! Market life is more normal when the VIX is in the low teens! But we’re getting there.
The US economy is on the mend and statistics somewhere between now, and Christmas should show the US economy is recovering. That’s why the S&P 500 has put on 36 per cent since early March.
It also explains why our S&P 200 is up around 24 per cent since then, as we are playing follow the leader with Wall Street’s ups and downs.
On the economic front, the OECD confirmed my suspicions that the Aussie economy won’t do as badly as the Budget predicted, nor as badly as many economists working for banks have forecasted.
Economist Craig James from CommSec has always been the outlier, who was more optimistic about Australia’s prospects. (And I’m glad our website will have access to his daily observations on the economy.)
The OECD thinks we will grow by 2.4 per cent next year, after only shrinking by 0.3 per cent this year. James has similar readings on the economy and thinks unemployment will peak below seven per cent. That could be a big call, but I hope he’s right.
Thankfully, China is growing better than expected and the stimulus packages have helped keep us out of a technical recession, and that’s a big psychological plus for small business and consumers.
Recently, the Sensis surveys of small businesses and consumers revealed record rises in confidence, and I have always found their SME survey to be a good indicator.
A pullback on the US stock market is predicted by many experts and, after a 40 per cent rise in a short time, it does make sense. Only something from left field, or an X-factor, could make the market panic its way down to the March lows.
US economic news continues to raise optimism levels, with the University of Michigan's index of confidence going from 68.7 in May to 70.8 in June 2009. However, American savings hit the highest mark for over 15 years in May. At 6.9 per cent, this is the highest level — the most since December 1993. This is a big improvement on the near zero reading in early 2008.
Saving increases in recessions and it will hold back the recovery, but I reckon the US consumer will eventually make a comeback.
While there are still a few worrying, negative rogue comets out there, it is becoming easier to see that all of the important positive ‘planets’ are starting to align.
Watch this space for daily updates on our economic cosmos.
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