ASX Rises Strongly: Is There More Downside?

The ASX rose strongly last week by 1.7 per cent, which is positive news for investors but is there still more downside to come on the Australian stock market in 2020?

Creating wealth in a low interest environment

With the RBA board due to meet on 6 October, speculation is mounting as to whether they will reduce interest rates further in a bid to stimulate the economy. Since 2016, interest rates have been reduced five times and are now at an historical all-time low, and while Australia has weathered the COVID storm quite well, I don’t think anyone would agree that the economy is in great shape.

The stock market is recognised as a leading indicator of the economy and if we look back at the growth of the All Ordinaries Index since 1 January 2016, we find that it has risen just over 13 per cent, which is not that spectacular. Nor is it a sign of a booming economy, so you have to question whether lowering interest rates has been beneficial.

In March of this year, the RBA dropped interest rates twice down to 0.25 per cent due to the COVID-19 pandemic. While lower interest rates have made it a little easier for those with mortgages, you have to ask if it has really stimulated the economy. At a quarter of a per cent, interest rates can’t go much lower, so I doubt a further drop will do much, instead it is time to re-think the strategy, as I suspect that the Governments continued support for Job Keeper and other stimulus packages may do more.

It is highly likely that this low interest rate environment will last a few more years and bring increased opportunity for those who take advantage of it. Now is a great time to look at the benefits of reducing your mortgage versus using the extra cash flow and/or home equity to fund further investments. Additionally, if the government is successful in its bid to relax lending laws to make it easier to borrow money, as recently announced, this will add weight to the argument that you should use this opportunity to increase your wealth.

While I am all for reducing debt on your home loan as quickly as possible, there comes a time when it is more beneficial to use the equity in your home to invest for your future. As all too often, people pay off their home loan before looking to invest, as they believe this creates more financial security. However, while this may be somewhat true, the mere fact of paying off your home loan before you invest severely restricts your ability to create wealth.

The opposing argument is to create more wealth in your life, as this gives you more security, especially when you consider that investing in good assets can also lead to paying off your home loan faster. More importantly, building wealth earlier in life results in more assets in retirement, which has to be good. Everyone should look at this low interest rate environment as a once in a lifetime opportunity to not only reduce housing debt but also invest for the future. Of course, if the government relaxes lending laws, the opportunity will get even bigger.

What were the best and worst performing sectors last week?

The best performing sectors included Healthcare up 4.18 per cent followed by Industrials up 3.76 per cent and Utilities, which ended the week up 3.51 per cent. The worst performers included Materials down 2.26 per cent followed by Energy, which was just in the green up just 0.64 per cent and Communication Services up 1.27 per cent.

Looking at the ASX top 100 stocks, the best performers included Whitehaven Coal up 14.12 per cent followed by Transurban Group up 8.37 per cent. National Bank and APA Group were also up over 6 per cent, while Xero and Bendigo Adelaide Group were up just under 6 per cent.

The worst performers included Virgin Money down 12.42 per cent followed by Evolution Mining, Northern Star Resources and Unibail-Rodamco-Westfield, which were all down over 8 per cent.

What's next for the Australian share market?

In a nice change, the Australian stock market fell away earlier in the week only to rise later in the week to close up 1.77 per cent. However, before you get too excited believing the recent down move is over, it is part of normal market fluctuations for price to move in the opposite direction before continuing the longer-term move.

Given that the All Ordinaries Index has generally been falling over four weeks and was down, at one stage, 6.5 per cent from its 25 August high, it is likely we will now see it rise for one or two weeks before it falls away again.

As I have been saying for quite a few weeks, the market is slowly moving down into its next low, which I believe will be below 5,800 points and possibly as low 5,400 points. While I still expect this to occur, anything can happen in the market given the uncertainty around the world; therefore, if the rise is longer than two weeks, this may change my opinion.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.