Why is the Market Not Booming like the Economy?

Just over a year ago, the nation was plunged into uncertainty as COVID-19 started to take hold, forcing almost everyone into lockdown. Prior to this, the Australian economy had broken records for the longest uninterrupted economic growth in the developed world before falling into a technical recession.

Economic growth strong yet stock market lagging

As a nation, we banded together and the economy is now booming with strong GDP growth in both the September and December quarters, and with only a few weeks left in the current quarter we are set to make it three in a row. The ABS statistics show that household and online spending is up, while the housing market is also booming. Given this, you may be asking why with all this good news is the stock market not rising strongly.

Historically, since the low on our market following the 1987 crash, the All-Ordinaries Index increased at a rate of 0.52 points per day up to the all-time high achieved in February 2020. Looking at the move up from the COVID-19 low in March 2020, we can break this past year into two parts. In the first 22 weeks since the low, the Australian market rose at a rate of 12.59 points per day and in the 25 weeks since that point to the recent high on 17 February, it rose 4.78 points per day. To put this into perspective, the rise out of the March 2020 low was around 30 per cent faster than the rise up from the March 2009 low following the GFC.

Given this, the All-Ordinaries Index is still moving quite fast despite the fact it is showing signs of slowing down. In fact, a statistic that may shock some, the Australian market together with South Africa continue to be the best performing stocks markets in the world and have been for over 100 years. Based on this, you have to wonder why so many are choosing to invest in the US market.

What were the best and worst performing sectors last week?

In yet another relatively flat week for our market, Consumer Discretionary led the way up 4.11 per cent followed by Industrials up 3.68 per cent and Utilities up 2.6 per cent. The worst performing sectors included Energy down 0.99 per cent followed by Financials down 0.14 per cent and Materials, which was just in the green up 0.55 per cent.

The best performers in the ASX/S&P top 100 stocks included Appen, which was up over 12.97 per cent after Director, Mark Brayan, increased his shareholding by exercising some of his performance rights. That said, before you get too excited, while the price rise on Appen looks good, I believe there is further downside for this stock. Next was Aristocrat Leisure up 10.34 per cent and Treasury Wines Estates up over 8.44 per cent. The worst performers included Santos, which was down 6.96 per cent followed by the a2 Milk company, which was down over 5.80 per cent and Lend Lease down 4.16 per cent.

What's next for the Australian share market?

I feel like a broken record, given we experienced another relatively flat week on the Australian market despite last Fridays move, and we have had a flat start to the year with the All-Ordinaries Index rising 2.3 per cent since 1 January. Until last Fridays move up, the All Ordinaries had fallen over 3 per cent since the high on 17 February and has not looked strong in the short term. So has my thinking changed given the market rose just under 1 per cent on Friday?

Given that over the prior two weeks, the Australian market traded down and closed lower on both occasions at around 6,940 points, it was good to see it close higher last Friday. That said, Friday’s move could just be a short bounce before the market falls once again.

Until the market confirms it is moving up, I believe the market is falling into the low I was expecting a few weeks ago, as it is a more conservative and better option given that a move up for one day is not sufficient to indicate the market will rise. To confirm the market is rising, we need to see price continue to rise this week and break above 7,200 points and to confirm it is falling into the expected low, the market needs to trade below 6,770 points.

The market will break out of this sideways pattern it is currently in very soon, and if the move is down, we need to be prepared for the fall to unfold over four to six weeks into mid-April and for the market to trade down to below 6,500 points. As I have stated previously, now is not the time to be entering the market, as investors would be better off waiting for the next confirmed run up.

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.