All that cheering on Wall Street is for a plan to use rubber cement and duct tape to patch some big holes in the financial system. Skepticism is in order.
Investors in 2008 have ridden about a 35 per cent plunge in the benchmark S&P/ASX200 Index and around a 37.5 per cent slump in the broader All Ordinaries, in a year marked by large corporate collapses and unprecedented fluctuations in financial markets.
THE Australian stock market will offer investors the best buying opportunity in a generation in 2009, after the bourse suffered its the biggest annual decline ever in 2008.
Australia's main share indices are expected to rebound by up to 30 per cent in the second half of 2009, some analysts say, making up some of the losses in 2008, as the yields on stocks eclipse those offered by cash or bonds and equity investors anticipate an economic recovery.
However, Dr Oliver said that, while he expects the US and global economy to start recovering in the second half of 2009, that could be delayed if a worldwide recession is more severe than expected. That would in turn delay the recovery in stocks.
Mr Heffernan, who expects the Australian sharemarket to recover about 20 per cent to 4200 in 2009, said investors needed to regain confidence.
In addition to the Fed’s attempts to inflate asset prices, there are a number of short-term positives for equities.
(1) The period post Thanksgiving through the end of the year has usually been a bullish time for stocks, based on studies by Jeffrey Hirsch (Stock Trader’s Almanac).
(2) With the exception of the Russell 2000 Index, all the major U.S. indices yesterday breached their 50-day moving averages. Should the bullish seasonal tendencies provide a further tailwind, the next targets for the various indices are the November 4 highs and the key 200-day moving averages, as shown in the table below. On the downside, the December 1 lows (not shown in the table) must hold for the rally to remain intact.
Investors wishing for a slightly less-awful portfolio for Christmas have just a fifty-fifty shot despite the fact that December is traditionally a good month in markets, according to Merrill Lynch strategist Mary Ann Bartels. She writes:
... S&P data shows that, despite the fact that December and January are historically the two strongest months, investors should not count on a Christmas rally. Using the index’s behavior from the Friday before Christmas to the Friday after New Years as a guide, there have only 13 holiday rallies over the past 25 years. In the last eight years (2000-2007) there have been four rallies.
What to watch for:
A base often takes months to complete, can involve multiple tests of the lows, and requires patience. A decline by the S&P 500 back though 840-815 would open the door for another test of 740-700 and perhaps 679-658. As for resistance, the dominant post-May downtrend line is crossing 1158 at the rate of a bit more that nine points per week. The top of the post October base provides first resistance at 1000-1050; second resistance could be as high as 1200-1325, which represented support prior to September’s breakdown.
But he said a cut in official interest rates here to 4.25 per cent in December, which was likely to be followed by more cuts in 2009, and the federal Government’s $10.4 billion stimulus package, would help an economic recovery.
The 32 per cent drop in the sharemarket in 1974 during the oil shock was followed by a 49 per cent surge in 1975, one of the best five annual returns.
During the Great Depression, shares fell 34 per cent in 1930, then bounced 11 per cent in 1931.
The historical longer term performance after such slumps is also encouraging.
The 10-year return after 1990, 1974 and 1930, when the dividend yield rose to around today's level, was above average, according to AMP Capital Investors head of investment strategy Shane Oliver.
“Shares are certainly cheap, there's no doubt about that,” said Dr Oliver, who helps manage $101 billion of assets at AMP.
But while the long-term prospects for the local bourse look good, in the short term stocks are likely to continue their violent fluctuations.
“There will be continued big rallies and big dips in the short term,” Perpetual’s head of Australian equities, John Sevior, said. Any rebound in the sharemarket also depends on a recovery in the US economy.