Will the Market be Bullish in the 2H of 2022

Last week the RBA chose to raise the official interest rate by 0.5 per cent making it the fourth consecutive month they have raised rates. This has resulted in fixed interest rates rises on property loans rising from around 2.5 per cent up to around 5 per cent, while variable rates have risen to over 4 per cent. The RBA seems intent on raising interest rates to historically normal levels, so anyone with a housing loan should be expecting to pay around 7 per cent by the end of the year.

What is the impact of rising interest rates?

Given this, I recommend that anyone with a loan get in front of the rate rises and start paying down their loan as if the rate was already 7 per cent. The earlier you start, the better off you will be, as the extra payments will mean you will pay less in interest over the longer term.

There is an old saying that if all you have is a hammer then everything looks like a nail, which appears appropriate right now as the RBA attempts to adjust the economy, but are these rate rises really working and are they necessary? Looking at the ABS statistics for housing released last week, and in particular, personal and business loans, new loan commitments for housing have fallen 4.4 per cent, while personal fixed loans have fallen by 15.2 per cent and business purchases of property were down 19.4 per cent in June. So, on the surface higher interest rates are having an effect.

If we dig deeper into the RBA report and focus on housing, we see that loans for owner occupiers, while falling 3.3 per cent have remained 50.2 per cent higher than pre-pandemic levels. Loans for investment properties, on the other hand, have fallen 6.3 per cent but remain 101 per cent higher than pre-pandemic levels.

While these figures may seem surprising, they relate to the value of the loan, not how many loans are being written. For owner occupiers, in four of the last six months applications have fallen, while investor applications have fallen in two of the last six months.

As the data suggests, the interest rate rises are having an effect but if we look at the statistics around mortgage stress, it seems the people who are most affected are those who can least afford it.

What were the best and worst performing sectors last week?

The best performing sectors included Information Technology up 3.25 per cent followed by Communication Services up 3.13 per cent and Healthcare up 2.87 per cent. The worst performing sectors included Energy down 3.02 per cent followed by Financials up 0.83 per cent and Materials up 0.88 per cent.

The best performers in the S&P/ASX top 100 stocks included the A2 Milk Company up 11.45 per cent followed by Block up 9.05 per cent and Virgin Money up 7.66 per cent. The worst performing stocks included Orica down 7.57 per cent followed by the Star Entertainment Group down 5.54 per cent and Santos down 4.79 per cent.

What's next for the Australian stock market? 

While the All Ordinaries Index rose over 1 per cent last week the current rise has slowed, which is understandable given that in the second half of July the market was very bullish rising over 5 per cent. As I mentioned last week, the strong move up in July is a very good sign that the bullish run will continue, however, markets don’t just rise up, they move up in stairs.

During last week, there was some indecision and weakness in the stock market until Friday when it looked stronger closing on its high for the week. That said, I am still expecting the market to fall for one or two weeks in order to confirm it will move up towards the end of the year.

As such, I am still recommending you remain cautious because as we have seen several times in the last few years, the market can move in either direction very quickly. One thing I am certain of is that any move down now will confirm whether the low of 6,581 on 20 June is the bottom of the bearish run this year.

Remember, we are in reporting season and while I believe we will see some good results, you need to expect the unexpected, which means the market or stocks you are looking at may be volatile for a short period of time.

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.