Why is the Australian Stock Market Continuing to Rise?

Right now many are asking why the Australian stock market has been so bullish in recent months and why is it continuing to rise. They are also wanting to know if it will continue to rise next year.

There are a range of different factors that contribute to the direction of the market and for the most part it reflects our confidence in business and the economy. If confidence is high or increasing the stock market will rise, which creates momentum. How fast or slow the momentum is will be determined by economic factors. The most recent of these being the election outcome and the subsequent RBA rate cut. In my previous reports, I communicated that the stock market was bullish prior to the election, and so the surprise election outcome increased the bullish momentum.

Money is flowing out of cash investments to stocks

With the RBA interest rate cut, we know that as the cash rate drops so do returns on cash investments. Therefore, with the cash rate being below inflation, it makes sense that investors would exit cash investments in favour of stocks to achieve a higher return together with the opportunity to also receive capital gains as the assets rise.

This influx into shares has seen the market continue to rise, particularly the banks and many other stocks in the top 20. Last week’s strong move up on the All Ordinaries Index, has been eclipsed this week with the market gaining another 2 per cent.

What have been the other major moves in the Australian stock market?

As for the sectors last week, Financials were up over 2 per cent. Given that eight of the top 20 stocks are in this sector, and the top 20 makes up nearly half of the market capitalization of the All Ordinaries index, it’s no wonder the Australian stock market as a whole is up. Information Technology and Utilities were the other big movers this week, up over 4 per cent.

CBA and Maquarie lead the banks up around 4 per cent, while Coles, another top 20 stock, also rose over 6 per cent. Of the top 100 stocks, Northern Star was up around 11 per cent and Magellan around 10 per cent. Caltex, on the other hand, advised the market of a sharp decline in first half company profits. Consequently, it was the worst performer for the week down over 11 per cent and nearly 50 per cent since January 2015, and it looks like there is more downside to come.

The All Ordinaries Index has risen over 22 per cent since the December 2018 low, and I still believe it will make a new all-time high very soon, and potentially before the end of this month. The stock market has risen around 4 per cent this month alone, which is significant considering that June is historically one of the worst performing months of the year. Given that the RBA is indicating it may cut the interest rate again this year, and possibly on more than one occasion, you would have to think the transition from cash investments to shares will only increase and support the current rise.

Vocus Group was once again in the news moving from being a top performer the week prior to being a bottom performer last week, as its roller coast ride continues. It was down over 23 per cent last week after AGL Energy pulled out of takeover talks. It certainly has been a bumpy past few weeks for Vocus shareholders, as the price of this company in the last six weeks has been up as much as 26 per cent and down as much as 40 per cent. In my opinion, this is not a stock you want to own right now, and if anyone is interested, I recommend waiting for the dust to settle.

So what do we expect in the Australian stock market?

My position on the Australian stock market has not changed, despite many other experts claiming that the market is over heated and, therefore, is expected to see it fall away strongly.

Currently the market is bullish and will remain bullish in the medium term with my target being 6900 to 7400 points. In the short term, I believe the ASX 200 will rise over the next two weeks breaking through the all-time high before falling away for one to two weeks into mid to late July. The sectors I like moving forward include Energy, Financials, Materials and Healthcare. There are also many stocks in the top 50 within these sectors that looking good right now.

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

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.