Bumpy road to recovery

Published in the Sunday Times, August 2009 by Katrina Barrymore

It looks like the share market bears have gone back into hibernation, as the bulls toss the market higher.

But will it last?

According to the experts, the Australian share market could be in for another clawing before a true recovery.

In the meantime, we appear to be looking at a "long and winding" road with good and bad around the corners.

With a 40 per cent rally in share prices since the low in March, it's tempting to feel that everything is rosy. But beware a false sense of security.

There is good news out there, but also significant risk and uncertainty.

"If history is any guide, caution is still warranted," wise-owl.com analyst Tim Morris said.

"Of the six occasions during the past 90 years when US share markets have fallen more than 40 per cent, recovery periods have typically been long and winding," he said.

"In terms of the size and timing of the falls we have just experienced, there are similarities to the ravages following the breakout of World War II and the mid-1970s oil shocks.

"During both of these episodes, share markets lost half their value, with most of the losses playing out over 12 months. Their recovery was prolonged, with fresh highs not seen for five to eight years."

The local rally since March is equal to 90 per cent if it is annualised, which is well out of whack with the average 11 per cent return.

"This frantic rise is clearly unsustainable. The old saying, `Shares go down the elevators and up the stairs', is still relevant," Mr Morris said.

CommSec chief economist Craig James also warned investors to tread carefully.

"It's certainly interesting, perhaps a little spooky, that the current share market recovery began in early March, the same timing as the start of the 2003-07 bull market," James said.

"So far, the recovery is following the same path of initial spurt, consolidation, correction and then resumption of the rally.

"But given that humans tend to shift between over-exuberance and pessimism, we should expect a bumpy path for shares in the coming months."

Wealth Within chief analyst Dale Gillham expects a dip.

"If the market continues to rise, probability suggests that it will fail to push through my upper target of 4600 points," he said. "When it does fall, it could move down to between 3500 and 3700 points by mid-September.

"How far the market moves down will indicate whether we can expect further falls or whether the next bull run will commence.

"For now, set stop losses to protect your capital."