Written by Hudson Adviser Phillip McGann
Share markets around the world have had a volatile 6 months. From August 2018 the markets began a steep decline on fears of rising US interest rates. What began as a US based pulled back quickly flowed around the world.
By Christmas Eve some US indexes were off 20% -in technical terms a correction - making it a very ordinary Christmas for many.
However since then it has been almost all up as the market has staged remarkable V shaped recovery.
GRAPH of US and Australian share markets since 1 August 2018 till this week.
So what triggered the optimism ion late December?
In two words; Interest Rates
The US Federal Reserve got spooked by the US share market pull back on fears it would continue to raise rates too quickly and cause a recession, hit the brakes on further US interest rate increases and telegraphed widely that it would not raise rates anytime soon unless the economy and inflation demanded it.
Since then the share market has exploded away and those same indexes that were down 20% into Christmas have now recovered all of the losses and posted new gains
The US economy continues to report record growth with an annualised figure of 3.2% for the March quarter reported last week which for the worlds largest economy is a very very strong result
Locally the Australian market has followed in the footsteps of its US cousin and we are now back to where the market was in the early part of 2007 before the onset of the devastating GFC.
So can the US markets continue to trade higher?
It all depends on sentiment and the underlying economy. The US economy as stated above continues to defy the naysayers and inflation is well in control – leading to good corporate reports. The US Fed has sidelined itself (for now) and so interest rate rises – which are anathema to share markets – are not a threat for the time being. So sentiment will likely rule the day. If investors are happy to continue to buy at these record levels the market could continue to ride higher but conversely sentiment is a fickle thing and investors may well pull back to lock in profits
Locally things are more complicated.
The overall market direction here is dictated more by China and their demands for our resources exports and also by the banking sector than by US tailwinds. The Chinese economy has benefited of late by accommodative government activity and resources prices have lifted leading to improved prices fro BHP and RIO. (Although iron ore prices have also benefited due to supply problems at major miner Vale) The favourable conditions may come to and end and share prices my retrace impacting the overall share market performance
The banks have seen off the Royal Commission with less impact than expected and their share prices have recovered this calendar year. The up coming reporting season will reflect the slowing economy and in particular the housing market that has been the star performer for banks for years. If profits are lower (due to both a slowing economy and a rise in bad debts) then dividends may well be cut which will lead to potential share price falls And given the banking sectors weighting in our benchmarks then the sector could well prove a drag on the index.
As for the Federal Election the impact is more circumspect Historically Federal election have limited impact on the local markets due to the “tweedle dee tweedle dum” set up of our major parties and the major economic policies.
This time however there is a real difference in economic and tax policies between the majors and this had fed through into a number of market reactions even before the election was called – witness the large special fully franked dividends and buy backs paid out by major companies trying to get ahead of any potential change in the franking credit regime by an incoming Labor Government.
Any change in government has been weighing on the market for the past 12 months as other factors have been impacting as well
Finally add to the mix the fixed interest market predicting RBA rates cuts over the coming month and you have a very volatile mix of issues for investors to contend with.
In Summary whilst overall the tail winds from offshore markets (mostly US) continue to be positive, sector specific factors locally in our concentrated market and the performance of the Chinese economy, as well as the outcome of a tightening Federal Election will again dictate the direction of local markets in the months ahead.