When it comes to investing, some things change and some things never do.
Share prices change.
Company names change.
And even investors change.
But one thing seems to stay the same: that the Australian share market relies on the US market for direction.
So, if that’s still true, what can you learn from the US that could help you predict where the Australian share market is going next?
Well, for a start, the US market is now in uncharted territory.
The US S&P 500 is trading at a new record high. This year it finally broke through the old highs from 2001 and 2007.
Since breaking through, the index has hardly looked back. It has been one new high after another.
The Aussie market is of course a long way behind. It’s still 35% below the 2007 peak. It has a lot of catching up to do.
So, is the US market heading for a fall now that it has reached a new high? Or has it built so much momentum that further gains are on the cards? And what about the Aussie market? Is it stuck in a rut or will it too break through to a new high in short order?
As always, it depends who you ask…
Why a New Market High Doesn’t Mean a Crash is Imminent
It’s certainly possible that stocks could fall. After all, we’ll be the first to admit that this bull market rests on little more than government fiscal stimulus and central bank monetary stimulus.
But for those chirping that a crash is inevitable due to the new all-time highs, we’ll make one key point. Following the 1987 stock market crash, it only took two years before the US market made a new high.
Using the current bear analysis, that should have rung alarm bells for another crash. And maybe it did. Yet for the next 11 years the US market made new high after new high:
Source: Google Finance
So if we use that as our benchmark, is there any reason why stocks can’t rally for another 10 years from here?
We know some folks will say we’re spruikers and cheerleaders for the stock market. But that couldn’t be further from the truth. Because we understand the problems with the current market, we also understand how these problems (as crazy as it seems) could boost the market this time just as they did the last time.
Why Sell Today When You Can Sell Higher Tomorrow?
Look, you know why we believe the market is going higher. It’s quite simple. Central banks worldwide will keep pumping fresh money into their economies for the foreseeable future.
Central banks will keep interest rates low for the foreseeable future.
And governments will keep spending and borrowing in the false belief that they’re helping the economy…for the foreseeable future.
As you can tell, that’s somewhat of a cynical view. We know there’s a problem with the world economy, but we’re using it as best as we can to help you make a lot of money from it.
The truth is, not everyone is cynical about this rally. In fact, if more investors were cynical about it, we’re not sure the rally would last as long as we believe it could last.
Some people – and this is true – actually believe the US and Aussie economies are in great shape as they head towards recovery. That’s why we’re so confident this rally will last.
To show you what we mean, take this from Bloomberg News:
‘“You have to pay attention to momentum in markets and that’s what this calendar year is showing”, Mortimer, whose firm has about $180 billion in client assets, said in a phone interview on Oct. 30. “Clients asked me, ‘Why don’t I take profit now?’ My theory is you can sell a lot higher later.”‘
We’ll be straight up with you. When we read comments like that it makes us nervous. ‘Don’t sell today, sell another day at a higher price’. Really?
No mention at all of the possibility that you may have to ‘sell a lot lower later’.
Most Hated Sector to Boom
But do you see what we mean? There are thousands, if not millions of investors who hold the same view. They’re like the housing spruikers who believe house prices always go up.
It’s these investors who we believe will help drive stocks higher. As the Bloomberg News article also notes:
‘The broadest equity rally on record will pick up speed through year end and lift the Standard & Poor’s 500 Index to the biggest annual increase in 16 years, if history is any guide.‘
This is why we’ve been bullish on stocks all year. It’s why we’re bullish on stocks now. And it’s why – all else being equal – we’ll stay bullish on stocks through the end of this year and into next year.
That’s why we’ve urged investors to get into stocks, especially small-cap stocks. And while for most of this year we’ve told you to buy income stocks to take advantage of investors’ search for yield, it’s now time for investors to start looking for bigger returns as this rally takes off.
The best place for those returns is in what has been the Aussie market’s most hated sector for the past two years. But investor attitudes are about to change. And when they do this sector will boom.
Just remember, this rally won’t last forever, but while it does it’s your obligation to make the most of it for the sake of building long-term wealth.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Read This or Retire Poor
