What a rollercoaster ride the Australian share market has been on over the past 12 months! With the All Ords peaking in August 2018 following a positive month on both Wall Street and the ASX, investors were suddenly spooked by the political turmoil in Canberra, and the All Ords lost $30 billion in one week to 23rd August.
Poor sessions on Wall Street saw US shares sold off heavily ahead of the start of the earnings season, and investors in Australia locked in gains seeing the ASX drop alarmingly through October and November. From the All Ords beginning 2018 at 6,167, it peaked at 6,481 on 30th August and came to a bleak end closing the year out at 5,709 on 31st December.
Since then, the Australian sharemarket has been actively recovering from the market volatility and unpredictability that it encountered over the past year; which suggests that I was sanguinely on point when proposing late last year that investors should be cautiously optimistic for 2019.
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 per cent in a very short timeframe. In that case, 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 to finally reach the bottom of the market.
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. Because of the information age and the power of the digital age, and a revolving door of lacklustre country leadership on a local and world scale, the old norms of the nature of the cyclical market have been rewritten for the 21st century.
The one thing that market 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. This has occurred over every cycle except the one we are in now. In November 2007, the market peaked at 6,873, closing at 6,853, then dropped through the Global Financial Crisis in 2009/10 to a low of 3,109. Since then, the market has slowly risen to its current intra-day level high of 6,869, finishing at 6862, but it still sits below the all-time intra-day high.
But while we may not yet have reached the all-time intra-day high, there is enough anecdotal evidence to suggest that the All Ords now has the best chance to surpass the previous all-time market high of 6,873 in November 2007 and is set to reach 7,000 points by year's end.
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.
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.
In the last six months these positive economic indicators suggest that the All Ords is set to reach the record market high. Add to this, the fact that the instability created by the Banking Royal Commission and the country's political uncertainty has now subsided, with investors feeling confident when the local political and economic landscape is free of major volatility. The market never likes uncertainty.
Keeping international volatility in check, it is foreseeable that 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. This will help to keep his voters confident is his ability to create a strong economy, low unemployment, low interest rates and a positive share market. It also seems most likely that now that Boris Johnson has been elected as the new UK Prime Minister the 31st October Brexit deadline will be met.
However, 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.
This is also a time where we need to become extremely cautious because at some point, in the mature stage of the 'Boom Phase', we will enter the 'Greed' cycle'.
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. You just never know how long or short the fuse might be.
To leave you with a final thought, here are some words of wisdom given to me by my father (a 40-year stockbroking veteran), when he was entering into the hustle and bustle of the share market, "Always remember to keep your head whilst all those around you lose theirs."
About Rod North
Rod North has survived four market booms and busts, working in the financial services industry for 30 years.
He is the founder and managing director of the award-winning investor relations, media and PR company, Bourse Communications, and a regular business and investment commentator.
He is the author of three books, including the best-selling 'Understanding the Investment Clock Your Road to Recovery'.Never miss a news update, subscribe here. Follow us on Facebook, LinkedIn, Instagram and Twitter.
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