All Ords Report 15 June 2017

Like me, you may be tired of hearing about Hilary Clinton and Donald Trump and what it could mean to the world economy if Trump were to be elected. But this ongoing battle hasn’t dampened the mood in the business community in Australia.

The most recent National Australia Bank business confidence index indicates that business confidence in Australia is up, despite the mining slump! And being a sports fan, in financial terms, this is like seeing one of our own win the Melbourne Cup!

This result followed Australia’s Sensis Business Index (SBI) survey mid-year, of Australia’s small and medium sized businesses, which confirmed that confidence rose in 2016 to its highest level in five years. These positive reports assist in keeping the Australian economy chugging along.

The data also indicates that the perception about the Australian economy is improving, which is what I have been saying for some time. We don’t have to wait for a business confidence survey to know what the perception is. You only have to look at a price chart of our share market, which is one of the biggest indicators of confidence there is. The Australian market isn’t in the big boom phase as yet, however it has been continuing higher over the medium term.

Remember this, perception can either boost or cut portfolio returns. So, given that small to medium sized businesses see the economy as improving, this is good for share portfolios over the medium term.

By medium term, I am referring to a period of greater than 3 months and up to 18 months. Greater than 18 months is long term, less than 3 months is short term. However, when reading financial industry articles an investment term could mean something quite different, depending on who wrote it and the type of investment it is referencing.

When you begin to understand how shares and markets work you will gain a greater understanding of the terms. The importance of this you will learn in the Diploma of Share Trading and Investment. Once you decide on the term for your investments, you need to select the shares, and a trading strategy for each share to give you the best return and lowest risk.

Traders looking for short term opportunities often make a huge mistake in thinking they can apply one strategy to any share but history demonstrates this doesn’t work over time. These people often get burned and some never return. So my message is simple, use a different approach if you want a different result.

What do we expect in the market?

Last week the All Ordinaries Index (XAO) pulled back nicely, as the analysis indicated was likely to occur in October. The market appeared to be testing support at around 5500 points and finally continued lower this week, which means we have a confirmed peak on the weekly chart at 5579 points.

We may see the market pull back to around 5400 points in the coming weeks, however, a strong move back above 5579 points would be an indication that the yearly peak is still to come, which means the market would move higher sooner.

Locally, in Australia, there’s more good news. New car sales achieved a record high. If you attended the Friday night session at this year’s Art of Trading workshop in Melbourne you would know to mark this type of announcement on your chart of the XAO and over time you will observe key economic indicators that add to your overall analysis of the broader market direction.

Commentary from a number of major brokers indicates that the US Federal Reserve (US FED) is likely to lift rates in December. It appears that the US FED are holding off until after the US election. My view has been that the FED would wait until early next year to lift rates. It will be interesting to see if they move earlier as this would indicate that the improvements in the US economy are seen as sustainable.

The concern in the financial industry is that there is a question mark over corporate earnings growth in the US and whether it is improving sufficiently to justify higher rates. An increase in rates means corporate bottom lines are impacted. Alcoa’s recent announcement didn’t excite the market, and it will be interesting to hear the announcement by Apple expected later this month.

A US manufacturing survey came in as negative again this month when economists forecast it was to be positive. However, there are concerns about keeping inflation under control. The US FED will be weighing up a basket of economic factors to make their final decision.

Dale Gillham is Chief Analyst at Wealth Within