Is the Current Volatility a Sign of Further Falls?

For the fifth consecutive month, retail trade figures in Australia are up according to the Australian Bureau of Statistics, with some suggesting this could be the catalyst for a further interest rate rise. According to the data, total retail turnover was up 0.9 per cent in April and again in May, and while this is positive news, I don’t believe this would be enough for the RBA to raise rates again so soon, especially on the back of an unexpected 0.5 per cent increase in June.

Retail spending declines as inflation and interest rates rise

Taking a closer look at the data, it shows that while retail spending is up, it has slowed considerably compared to the first quarter of 2022, as spending from January to March increased at least 1.6 per cent each month. Given that April and May only achieved growth of 0.9 per cent, this is an indication that consumers may be starting to feel the effect of rising inflation and interest rates.

It seems that those in South Australia are spending more with retail turnover up 1.9 per cent followed by NSW and Victoria, which are both up over 1 per cent, while Queensland and the ACT spent less in May. Not surprisingly, department stores were the big winners with spending up 5.1 per cent followed by cafes, restaurants and take away food with spending up 1.8 per cent in May, while clothing, footwear and personal accessory retailing was down 1.4 per cent.

We know that pent up demand caused by successive lockdowns has driven increased spending in the past year, while supply chain issues has pushed inflation to higher levels. It maybe that the current figures are a sign that demand is easing, and things are returning to normality. For investors, the broader retail sector is unlikely to do well in the coming months; therefore, I recommend they be very selective when looking for opportunities.

What were the best and worst performing sectors last week?

The best performing sectors included Utilities up 1.47 per cent followed by Industrials up 1.16 per cent and Consumer Staples up 0.70 per cent. The worst performing sectors included Communication Services down 2.20 per cent followed by Information Technology down 2.13 per cent and Materials down 1.71 per cent.

The best performers in the S&P/ASX top 100 stocks included Iluka Resources up 6.85 per cent followed by Challenger up 5.43 per cent and Computershare up 5.07 per cent. The worst performing stocks included Evolution Mining down 29.59 per cent following a downgrade in its production forecast for Gold followed by Northern Star Resources down 14.77 per cent and Newcrest down 12.02 per cent.

What's next for the Australian stock market?

The Australian stock market started last week strongly and was up nearly three per cent in the first two trading days, however, those gains were quickly wiped out with the market closing the week down 0.62 per cent, which highlights, once again, how volatile our market is at present.

After experiencing six straight days of rises, it was not unexpected to see the market fall for a few days and generally this is nothing to worry about. That said, if the market was bullish, the down days would not have been as severe as what we experienced last week, which may be a warning sign. As I have stated previously, on numerous occasions, it is too early to tell if the All Ordinaries Index had stopped falling and last week only added weight to this.

As we have recently experienced, anything can happen and without wanting to sound overly bullish, it is still possible the market has bottomed. That said, I believe it is far wiser to assume further falls are likely and to plan accordingly, as we could see price challenge the low of 6,581 points set on 20 June. If the market does fall, it will find strong support around 6,200 points and it is unlikely to fall below that level.

Right now, I recommend investors sit tight and get ready for the next opportunity to buy that will come in the not too distant future.

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 bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.