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The US share market has broken out of its torpor between August and October and is now advancing strongly. You can see that in the following chart for the S&P500 index.
Unfortunately, the same can’t be said for Australia’s share market. The All Ords index is still gyrating sideways with no sign of breakout.
Why America not Australia?
The most obvious reason for Wall Street’s breakout is that Trump has caved into China and decided to stall his trade war. He now recognises that his tariff push is undermining business confidence and slowing American production, which imperil his chances of re-election. Poll after poll shows most Americans hate Trump’s style (especially his tweeting) but are pleased with the economy (low interest rates, low unemployment, rising wages and modest growth). Should the economy sour, Trump is toast.
The other boost to the US stock market is the Federal Reserve’s assurance that it won’t increase interest rates further unless inflation takes off, which seems most unlikely.
Towards the end of October, the Fed cut rates for the third time this year and its Chair made a remarkable statement that elated the market:
“I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.” (Jerome Powell 30th October 2019)
Just as Trump has surrendered to Xi Jinping, Powell has surrendered to Trump, who for months was threatening to sack him for trying to normalise interest rates. America is now locked into a low interest rate environment until there is a “really significant” and “persistent” blow out in price inflation.
With no one expecting consumer prices to take-off any time soon, the market has decided that shares warrant an even higher price/earnings ratio because the hurdle rate (i.e. expected return) for companies should be “lower for longer”. Lowering the hurdle rate so that more investment projects pass muster is what Josh Frydenberg has been advising Australian companies to do, but so far without success.
Here is a chart of the US 12-month trailing price earnings ratio, which remains abnormally high. Yet US bulls claim that we are in a “new paradigm”, where a trailing P/E ratio in excess of 20 is the norm, not the post-WWII average of 17.3, let alone the average since 1900 of 15.8.
Weighing down the Australian market are local factors, namely the drought and bushfires (which could prove to be the worst on record), the collapse of home building (notwithstanding a recent rebound in home prices), falling retail sales (reflecting stagnant wages and a reluctance to run up credit card debt), depressed business investment (because of overcapacity) and a refusal by the federal government to resort to fiscal stimulus (since it took 10 years to get the budget back in the black).
Notwithstanding the bravado of the bulls, America’s S&P500 index on fundamentals is vulnerable to a sharp drop. In fact, it’s been way overvalued for a long time, yet continues to defy gravity.
But as the bulls rightly say, there is no obvious threat to market’s exuberance, except perhaps Elizabeth Warren (the Democratic Presidential hopeful), who is telling voters to vent their anger against Wall Street, not Washington. Interest rate or oil price spikes (the normal triggers for a crash) are not imminent.
The US market looks top heavy, but its renewed upward momentum can’t be ignored. Other national markets, including Australia, are likely to follow. Also, we are now in the seasonal six months (November to April) when stock prices typically make most of their gains.
Market Timing Australia’s Active and Conservative trading strategies remain on a Buy signal because the Australian market’s price trend continues to be positive over both short and long-time frames. MTA’s World Rotation strategy is on the cusp of switching back to shares because gold is losing its relative price momentum. MTA’s Australian Rotation strategy remains with gold because Australian shares, notwithstanding a positive price trend, have still not overtaken gold on price momentum over the medium term (nine months).
No one knows what the future holds. But the risks of a US crash will intensify as its market vaults to new heights. Don’t let America’s sky height confidence make you think the market is now riskless. Note in the next chart how America’s last three recessions were each preceded by “irrational exuberance”. Currently, consumer confidence is abnormally high.
Source: Advisor perspective
MTA’s strategies are designed to respect a market’s trend until it bends. In other words, to allow the market itself to signal when it’s bullish and when it’s bearish. The strategies are not foolproof, but they automatically vacate shares in a bear market when only cash or gold are king.
TimerTrac.com, the US based performance auditor of market timers, continues to rate Market Timing Australia’s Conservative strategy as one of the best in its global league table over any time frame in the last 10 years.