It’s been a good week for the ASX so far.
The local share market has recouped most of the $55 billion it lost on September 30. Global stocks are on the up too. The S&P 500 has recorded five days of gains dating back to last Tuesday. That’s remarkable for no other reason than that it’s first time that’s happened this year.
As the bears make way for the bulls, investors are riding high on stocks. The outlook for the future, in some quarters, is equally upbeat.
According to Citi analysts, 2016 could prove a particularly strong year for the ASX. The bank forecasts the local market hitting 6,200 points by the end of next year. That would be a significant feat, what with the ASX currently sitting at 5,022. It’d need a hefty 1,200 point swing to hit Citi’s target, a 20% rise.
It’d be a welcome change of pace, there’s no denying that.
The past three months have seen carnage on global stock markets. The previous quarter was the worst performing one since 2011. China’s main index, the Shanghai Composite, lost 2,000 points between June and September. The S&P 500 is down only 13 points for the quarter. While it’s now holding firm at 1,987, it’s recovered since hitting a low of 1,867 in August. As for the ASX, it’s down 5% since June, having shed $90 billion off its market cap.
Now that the supposed worst is over, thoughts turn to the future.
Citi reckons fears China would drag the world into recession were exaggerated from the outset. Now that it believes those fears are subsiding, it’s become very confident about the future.
Citi’s now forecasting global economic growth of 2.6% for 2015. During 2016, it predicts the global economy growing at 2.9%. All of which would bode well for global markets, not least the ASX. Here’s a snippet from Citi’s statement (emphasis mine):
‘The market PE ratio of 14.5 times is now at its average of recent decades. [That’s] despite the low interest rate environment, which should support a market multiple above the long term average.
‘Assuming a slight expansion in the market multiple, combined with expected future earnings growth, leads us to our new end of 2016 target of 6,200.
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‘It’s worth pointing out that corrections are an inevitable annual event even in bull markets.’
Corrections may be an inevitable event in bull markets. But it goes the other way too. As The Daily Reckoning’s Greg Canavan explains, stocks markets don’t follow a clear logic even at the best of times:
‘When I say things are looking good [for the ASX], I don’t really mean things are looking good. I simply mean that for now, the pressure is off and the perception is that the worst is over.
‘But keep in mind that the sharpest rallies often occur in bear markets. This is a result of the extreme bearishness that exists around certain points…like when everyone thinks a major commodity producer will go to the wall.
‘The news panics the weak hands into selling and encourages traders to make bearish bets by going ‘short’. The argument for shares to keep falling seems like a no brainer.
‘It’s this dynamic that creates the fuel for the next rally. Internally, the market is all out of whack. All the bears have sold and they’re sitting back, waiting for more selling to take place.
‘Right now, the market remains in a well-defined downtrend. This rally is merely restoring some balance. I won’t get bullish on the market in general until the downtrend is over. That’s likely to take a few more months at least’.
The downtrend Greg refers to may continue on for another few months. Or it could just as easily drag out well into next year. Much of it will depend on the health of the Aussie economy.
Keep an eye out on next month in particular. By November we’ll get conclusive evidence of how the economy fared in third quarter.
And it’ll put into context some of the ‘positive’ titbits of economic data coming out recently. The ones which paint a healthy jobs market. That show a surge in output across the services sector.
Even a worse than expected trade deficit, which blew out to $3.1 billion in August, is framed as a good thing. Supposedly it’s masking strong net export volumes, which will show up in Q3 GDP figures.
And what happens after that? The economy will need another hit. Like the junkies we’ve become, the RBA will give another dose of rate cutting. Just enough to keep people spending, and their minds away from the mountain of debt we’ve built up…the eye-watering $1.6 trillion in household debt. And just enough to inject another round of easy credit into the ASX, too.
How long can we keep this ruse up? No one knows, or seemingly cares. But one thing’s for sure.
The bears will return, one way or another. It’s all part of the bipolar nature of the stock market game.
Contributor, The Daily Reckoning
PS: The Aussie share market has lost 5% since June, or more than $90 billion in value.
The Daily Reckoning’s Vern Gowdie saw this coming. He predicted the current market correction at the beginning of the year. But Vern says we haven’t seen the worst of it yet.
He’s convinced the ASX will lose as much as 90% of its market cap in the coming months. As China’s economic slowdown picks up pace, volatility will follow.
Vern is the award-winning Founder of the Gowdie Family Wealth and The Gowdie Letter advisory services. He’s ranked as one of Australia’s Top 50 financial planners.
Vern wants to help you avoid this coming wealth destruction. That’s why he’s written this free report ‘Five Fatal Stocks You Must Sell Now’. As a bonus, Vern will show you which five blue chip Aussie companies could destroy your portfolio. You’ll be surprised to learn which banks make Vern’s list…
To find out how to download the report, click here.