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What’s my biggest fear? And am I investing?

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Our economy is looking weak but it might be on the improve, though most economists think a Cup Day rate cut is still on the cards, which suggests the number crunchers’ computer programs on the economy says “it still stinks!” However, the All Ords — the biggest measure of our stock market’s health — hit an all-time high yesterday!

This has to make many ask: “How does that work?”

And it’s a very good question but I might need to give a bit of a history lesson to explain this apparent oddity that a crappy economy doesn’t stop the stock market cracking a best-ever level of 6862.4. By the way, until yesterday, the best level for the Index was 6853.6 set on, wait for it, 1 November 2007, which was the day the GFC kicked off!

This recent milestone was reached on a day when the All Ords spiked 49.9 points (or 0.7%), despite the IMF telling us that it’s downgrading the global economy’s growth from 3.3% to 3.2%, though it sees a better 2020 tipping 3.5% for next year.

And while that sounds important, the big fillip for the stock market was news that US and Chinese trade ‘horse-traders’ will meet next week to try to sort out a trade truce. Wall Street loves any good trade news and if trade peace eventually breaks out, I’d tip a 5-10% spike in stocks. But that’s only my best guess.

But back to our all-time high on the All Ords, which hardly makes a lot of sense to normal, common sense observers of the stock market, with our economy looking like it needs a life support apparatus.

Since the stock market rebounded out of the GFC in early March 2009, the Yanks are up about 340%, while our All Ords is up a tick over 120%. If you add in dividends, we’re up about 164% but we have lagged shockingly compared to the US market.

Why?

Well, we started off pretty well after the GFC, thanks to China. But when China slowed, it killed off the mining boom, which put a brake on our stock market. Then along came the Murray Inquiry into the Financial System that took a lot of cream off our bank share prices, which was then topped by the stock price smacking effect of the Hayne Royal Commission into our banks and other financial institutions.

The banks and others make up about 32% of the stock market. If you add in the big miners, it gets close to 50%.

In effect, the companies that stopped us from seeing our All Ords Index break its previous all-time high, are currently having a nice run up, which has helped the market go higher.

BHP, Rio and Fortescue are on a surge because there has been a tailings dam collapse in Brazil that has cut back the production from Vale, the biggest iron ore producer in the world. This has pushed up iron ore prices and our big miner’s share price.

Meanwhile, the end of the Royal Commission, which wasn’t as hard on banks as we expected, plus the end of Bill Shorten with his anti-franking credits and aggressive negative gearing policies, have helped to build investor confidence.

Throw on two interest rate cuts that have sent term deposit rates down to the 2% or lower region and you can see why dividend-paying stocks have helped take the All Ords higher.

But what about the crappy economy?

Well, given the stock market is known for investing on what it expects will show up some six months down the track, then this 22% gain since 2 January this year could be telling us that an economic comeback is on the cards.

Believe it or not, academic work has found the economy and the stock market don’t always correlate but when I hear this I ask: “Has a stock market boomed during a recession?”

Don’t even think about an answer to this because it’s an impossibility.

Right now, I believe two rate cuts plus tax cuts plus a minimum wage rise and the house price drop stopping, should help the economy. Add this to an end to the Trump trade war, our stock market should be set up for a big leap forward. But I make this prediction with a fair bit of apprehension.

Most economists don’t predict a US recession in 2020 and most think Trump will be trying for another positive year for stocks in his election year. Believing this, I’m investing but if we get another nice leg up with stocks after a trade deal, I could easily start to become less aggressive with my exposure to the stock market.

A sell off of some kind is overdue.

And what’s my biggest fear? Donald’s ducks and drakes negotiations with China stall, he slams tariffs on the $US300 billion worth of Chinese goods that aren’t tariffed and the Chinese stop talking and wait out the US President hoping he gets clobbered at the November poll.

This scenario would be terrible for the global economy, the stock market and my super fund!

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Published: Thursday, July 25, 2019


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