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Can you trust Santa is coming to this crazy stock market?

Peter Switzer
9 October 2015

By Peter Switzer

It’s another positive day on Wall Street and it’s bound to be good for our stock market, which has now gone from a low of 4918.4 on the S&P/ASX 200 index, to yesterday’s close of 5210.4. That’s a 292 points rise (or 6%) since September 30 (in six trading days)!

A month before, in August, we were around the 5700 and mid-April we made our highest level of 5996.40! Yep, we were nearly at the 6000-level but the ‘you know what’ hit the fan and we’ve been struggling ever since.

What happened and have the forces that caused this market slump changed for the better? (To be mathematical, we were at 5996.4, then went down to 4918.4. That was a 1,078-point nosedive or 17.9%)!

That’s huge, remembering that a correction is a 10% plus slide, while a 20% loss sees journalists pull out the “crash” headline. Purists would say we’ve entered a bear market.

That bull we’ve hung around with since March 2009, when the S&P/ASX 200 index was at a GFC-low of 3120.80, was nearly morphing into a bear before our very eyes!

That said, we’ve come a long way since 2009. At our high this year, we were up 2,876 points (or 92%). If you add in 24% for dividends, we’re back in the black after a little under seven years!

Now we’re only up 67% plus dividends and that’s a 91% gain, so the GFC yoke is still weighing down our portfolios and super funds.

Why has this happened? Try these:

  • China’s economic growth looks weaker than expected.
  • The US’s expected great growth prospects were set to give the Yanks their first interest rate rise since June 2006 and this spooked the stock market.
  • Oil and iron ore prices, as well as other commodity prices, have been weakening, following the poorer outlook for China.
  • Greece worried markets for some time around July. 
  • The global economy was not as strong as was hoped.
  • The rising greenback hurt commodity prices, priced in US dollars, and the outflow of money to America undermined many emerging economies, which spooked stock markets.
  • At home, our economic growth was more like a low 2% rather than a high 2% to 3%. This was linked to underperforming companies, which meant market smarties virtually said: “With all the above going on, our valuations are way too high!”
  • Making this worse was the David Murray effect, which  inspired APRA to force our banks to do capital placements that saw CBA’s share price go from a high of $96.17 on March 23 to its current price of $75.37. That’s a 21% slide!

Not happy David, not happy!

The next question is: why is our market going up now? Here’s a quick list:

  • The selling recently was over-the-top and smarties have made money from creating the illusion that this was the market meltdown some experts have been predicting for seven years.
  • The 142,000 jobs in the US in September, when 203,000 were expected, have many thinking the Fed won’t raise this year.
  • Energy prices have rebounded. If everyone thought they wouldn’t fall again, stocks would spike.
  • Locally, our economic data is looking better but, if it’s a false dawn, the RBA would cut rates again. I hope this doesn’t happen because the media headlines would hurt confidence.
  • Dividends are a powerful influence on a stock market and the big sell off pushed up dividend yields and demand for these stocks.

Can we trust this rally?

My gut feeling is that a big fall is looking less likely. The US economy will surprise on the high side but the Fed could wait until next year before it rises, making interest rates low for longer and that helps stocks. Greece is no longer an issue and Europe’s economy is picking up.

Meanwhile, the Fed’s decision has weakened the greenback and emerging economies have seen better days on their stock markets. Also, I know this sounds rude but US commentators often say October is the “month of bottoms”, where Wall Street turns around, ahead of a nice Santa Claus rally in December. This often rolls into January and February.

I expect a Christmas rally and it could start before the sound of jingle bells and Bing Crosby singing “I’m Dreaming of a White Christmas” becomes nearly unbearable. However, there could be one more test of this newfound optimism but I’ll use that as a reason to buy more dividend-paying stocks.

One day, the global economy will look stronger, so will the US economy. US interest rates will be on the rise and our economy will have around 3% plus growth and the CBA might be heading back towards $90 plus.

I can wait until that day shows up. I say that because I don't really want an outrageous boom because these always end in crisis-creating crashes.

I’ve argued for a long time that we’re in a long, slow, grind higher for both the economy and the stock market because we dodged a Great Depression bullet, thanks to the easy money policies used by central banks around the world and some fiscal largesse that rescued us from 20% unemployment, bankruptcies and international economic dislocation.

Coping with this crazy stock market is nothing compared to what we’ve sidestepped, so stop whinging!

(For the numbers types out there, the Dow was up 139 points, which should be a positive for our market today.)

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