Will the Australian Stock Market Crash in 2021?

In recent months, there has been a lot of talk about the US stock market crashing, which has Australian investors worried that we may experience a similar event. However, while the Australian market broadly moves in line with the US, we also run our race. Therefore, just because the Dow or S&P500 may fall, it does not mean that the Australian stock market will crash.

US stock market not that strong

Recently, the Boston Consulting Group released their 2021 list of most innovative companies and there were no surprises with Apple, Alphabet (Google), Amazon and Microsoft all in the top four followed by Tesla. It may surprise you to know that, according to Bloomberg, these top four companies accounted for around 25 per cent of growth in the US market in the last quarter.

When looking at the S&P 500, it has only risen around 5 per cent since 1 May 2021, yet Apple is up over 10 per cent, while Google is up over 13 per cent, Amazon is up over 4 per cent and Microsoft is up over 14 per cent over the same period. This implies that these companies have been holding up the index and that overall the US market is not that strong.

That said, this doesn’t mean the US market is ready to crash, as rampant speculation and the broader market rising strongly would typically proceed a crash. So, while the US market may fall, in my opinion, a crash is unlikely.

What does this mean for the Australia stock market?

Our market is driven largely by the Financial and Materials sector, which is roughly 50 per cent of the total market capitalisation with financials dominating, as it contributes to around two thirds of this figure. This year the All-Ordinaries Index has risen over 12 per cent, while the Materials and Financial sector have both risen around 17 per cent.

Materials only recently broke above it previous all-time high from early 2008 while the Financial sector is still trading 15 per cent below it previous all-time high set back in early 2008. This explains why our market has lagged the US market in terms of growth for quite a few years, and it also explains why our market is unlikely to crash.

For the Australian market to crash, both sectors would need to fall heavily and given how they have been unfolding, I do not see this occurring any time soon. Similarly, for the US market to crash, we would need to not only see the top four stocks fall heavily but several others such as Facebook and other large technology stocks together with the large financial and energy stocks. Therefore, while the US market may slow and even fall somewhat, a crash, which is in the vicinity of 25 per cent or more seems unlikely.

What were the best and worst performing sectors last week?

The best performing sectors last week included Materials up 2.82 per cent followed by Industrials up 0.07 per cent and Financials down 0.18 per cent. The worst performing sectors included Information Technology down 3.64 per cent followed by Utilities down 3.29 per cent and Energy down 2.22 per cent.

The best performers in the ASX/S&P top 100 stocks included Lynas Rare Earth up 14.15 per cent followed by Oz Minerals up 9.29 per cent and Orora up 7.46 per cent. The worst performing stocks included Crown Resorts down 14.07 per cent followed by The a2 Milk Company down 13.57 per cent while AGL Energy, Afterpay, Magellan and Origin were all down over 9 per cent.

What's next for the Australian share market?

Yet again, the Australian stock market has failed to make a strong move in any direction. After rising early last week to achieve a new-all time high on Tuesday, the market failed to rise over the remainder of the week. In the last six trading days, the All Ordinaries Index has risen just 0.60 per cent while over the last 33 trading days, it has risen a mere 0.3 per cent.

As I mentioned in my previous reports, the market has continued to have a mind of its own all year and is often doing the unexpected. This lack of direction is frustrating for investors and traders, as it appears that we are collectively waiting for a sign that our economy is either going to be very good or very bad in the coming year before we make a decision to buy or sell. This could be the reason why the volume of shares traded on many of our top stocks is down from 2020.

This state of uncertainty in our market is likely to persist, at least until we have more certainty about COVID and the fear of perpetual lockdowns affecting our livelihoods. Therefore, I recommend investors become much more selective in the stocks they hold, as a broad based approach to profiting right now is not the answer.

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.