Why the Economy is Driving the Stock Market Higher

Let me start this report off by asking whether you believe the Australian economy is in a slump or is it starting to boom? No doubt, your response will depend on who you have been listening to.

Perhaps you may be thinking that our economy has been tough and the worst is behind us, or maybe you believe there is more bad news to come. If you pick up any newspaper, invariably there is someone trying to convince you the economy is good while others are saying it’s bad. Economists are continually communicating that retail figures and consumer spending is below expectations, yet at the same time the property market is booming. So what is going on and, more importantly, what should you do about it?

Riding the waves

According to Austrade, Australia is the 14th largest economy in the world at 1.4 per cent of global GDP, and it has had 28 years of uninterrupted annual economic growth. Austrade are also forecasting annual real GDP growth in Australia of 2.7 per cent over the next five years. If we achieve this, Australia will be growing faster than the USA, UK and Europe, although we will still lag behind China, India and other Asian countries which are expected to grow between 5 and 7 per cent. Given this, it would appear the worst is behind us and we can look forward to a bright future.

While understanding the economic climate is important, what’s even more important is how this affects your investments in the stock market. Future earnings or growth in the stock market is factored in at least six months in advance. In other words, the stock market is a leading indicator of as to the health of our economy. Right now, the Australian stock market is bullish and regulars of this report know that I expect it will continue to be bullish throughout 2020 and beyond.

While the Coronavirus will continue to have an impact on the Australian economy for some to come, it is not nor will it ever be a catalyst for our market to turn bearish or crash. It is simply a speed hump that may slow down some areas of the market but it won’t stop the bull run. Given this, investors would be wise to ride the waves rather than jump ship.

What were the best and worst performing sectors last week?

Once again the market has risen strongly although last week the charge was led by the Financial sector as it was up over 2 per cent, which was a good sign. That said, the Financial sector is still down from its high in March 2015 by 11 per cent, and if the market is to remain bullish this sector needs to continue to rise. Consumer Discretionary was also up over 2 per cent, as was Healthcare, which was still performing well, up over 60 per cent since 1 January 2019.

Once again, Energy was the worst performer although it is only slightly in the red for the week as was Materials while Consumer Staples was slightly in the green. Don’t discount these sectors for opportunities moving forward, as I believe they will provide many opportunities in the coming year.

Looking at the top 100 stocks, the best performers included Challenger which was up over 13 per cent while TPG gapped up over 11 per cent on news that it can now merge with Vodaphone. At one stage TPG was up 20 per cent on the day of the announcement, although it fell to close out the day where it started. While I believe the merger is great news, I am not convinced that TPG is bullish, so I am sitting on the fence right now. Other stocks that performed well last week include Virgin Money and Evolution Mining, both up around 9 per cent.

What's next for the Australian share market?

The All Ordinaries Index has shown how resilient it is, rising once again last week. Given this, I need to revisit my original thinking as it looks like it will remain bullish and move up over the next three to four weeks. Right now, it is sitting at the lower end of my original target of 7,200 points, and I believe it will trade up to my top end target of 7,600 points to make a new high that I have been expecting.

Let’s get into this week’s stocks of interest. Watch the video to find out more.

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 online and in all good book stores and online.