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The stock market cracked 7000. So what?

Peter Switzer
17 January 2020

The news outlets made a big deal of the 7000 mark on the S&P/ASX 200 stock market index yesterday, with radio and TV stations chasing me for a comment. It was an important milestone for those who spend a lot of their time worrying about or working with stocks but to the normal person, is it really a big deal? And why has it taken so long for Australia to beat its old all-time high established before the 2008 GFC of 6792.1, which only happened in November last year! The Yanks achieved their post-GFC high by April 2013!

A big reason was the end of the mining boom, which peaked in September 2012 and so big stock market pushers, such as BHP, Rio, Fortescue and other significant miners, worked against our market index going higher.

By the way, in case you don’t know what the S&P/ASX 200 Index is, it’s a calculation of how our top 200 companies in Australia have performed in terms of their share price. And while there are 200 companies in the Index, the big four banks, BHP, Rio and Telstra are so big they affect more than 50% of the Index!

The mining boom’s ending made it hard for the Index to beat its old all-time high. Then we had the Murray Inquiry into our banks, which made them hold more capital. This made banks safer but it hurt their profitability and their share price.

Then APRA, which controls the banks, cracked down on loans to Asians. That not only affected house prices but also hurt bank profits and their share prices. Falling house prices sped up when Labor’s Bill Shorten threatened to change negative gearing laws, as well as halving the capital gain discount.

This all came when elections are never good for an economy as businesses often hold back investment, until they know who wins.

We also had a revolving door of Prime Ministers — Rudd to Gillard to Rudd to Abbott to Turnbull to Morrison — and that never helped business confidence and share prices.

On top of all that, we decide to take a forensic spotlight and shine it on the practices of our banks, which crushed bank share prices. Recall how important the big four banks are to the overall Index.

They’re more than 30% of the S&P/ASX 200 because they’re so damn big, even by international standards!

Despite all that, I made the call in 2018 that 7000 was possible but I wasn’t expecting two big US things.

First, the US central bank hinted that it would raise interest rate three time in 2019 and Wall Street and Donald Trump hated that. And as the New York Stock Exchange, which lives on Wall Street, leads our market, that didn’t help our Index.

The US market dropped nearly 20% in the second-half of 2018 and we gave up close to 15%. The severity of the drop was made a whole lot worse by Donald’s trade war and the Chinese push back against his tariffs really hurt business confidence, investment and stock prices.

In contrast, 2019 was a huge year for stocks with the Australian share market rising 18.4% through 2019 for a total return of around 24%, once dividends are allowed, while the US market wacked on a huge 29%!

How come? Well, a trade deal was talked about happening from January and the US central bank cut rates three times, rather than raising them. Meanwhile, locally, the Royal Commission into our banks wasn’t as hard as we expected and our miners spiked on the outlook for global trade, with the trade war heading towards a truce.

The only bad thing holding back our stock market across 2019 was the slowing economy. Ironically, something really bad — the bush fires — will actually help the economy in the second half of 2020 because the Treasurer and his state counterparts will have to spend to repair our burnt out regional areas.

Josh Frydenberg will give up on his love for his potential Budget Surplus to direct money towards the consequences of the worst bush fire episode in the country’s history.

The dodgy economy also forced the Reserve Bank to cut interest rates to historically low levels and that has made the stock market look attractive, with term deposits at ridiculously low rates of interest.

Eventually, I expect we’ll see a stock market sell off because we’ve done so well but I believe we’re in for another good year for stocks overall, especially if Donald Trump wins the US election in November.

I know he’s not everyone’s cup of tea (or Coke — I bet he drinks Coke) but Wall Street and the US economy tend to like Mr Trump, despite his trade war hurting the global, the Chinese and even his own economy!

The trade deal phase one, which should be followed up by another trade deal over 2020, should help stocks trend higher, boost business confidence, raise investment from businesses once spooked by the trade war and, ultimately, help the world economy, including ours.

Hitting 7000 yesterday contributes to positivity, which is needed to turnaround the recent poor business and consumer confidence levels seen in Australia, which wasn’t helped by the bush fires. These could push our economy into recession in the short term before the government money pumps up the economy later in the year. So any positive headline like this busting of the 7000-level is a plus that we shouldn’t dismiss too easily.

Afterall, Aussies’ jobs, wages and businesses depend on optimism trumping pessimism in 2020, so I love the Index topping 7000.

Go the ASX!

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