FYI | Mar 26 2014
By Peter Switzer, Switzer Super Report
What’s wrong with the Aussie stock market? And why have we lagged Wall Street? And does this mean we can look forward to catching up with those damn Yanks over the rest of this year?
Well, there is no rule that we have to catch up with Wall Street and I can recall being in New York, though I can’t recall the year, when the New York Times hailed the Australian share market as being one of the best over a 10-year period, averaging around 10%, but the US market had done nothing — literally and statistically, nothing!
A history lesson
Of course, the Yanks had the Dotcom Bust and because we had been scoffed at for being a bricks and mortar economy before 2001, we then didn’t suffer as much when reality visited Silicon Valley and then Wall Street.
One rule that I am yet to have anyone dispute is that stock markets generally pass their old index highs before they dive again. But these are also the kinds of historical rules of thumb that can be KO’d as the Japanese would have experienced over the past 20 years.
As Wikipedia points out “The Nikkei average has deviated sharply from the textbook model of stock averages, which grow at a steady exponential rate.”
The Nikkei hit its best level ever on 29 December 1989, when it reached an intra-day high of 38,957.44 but over the next two decades it fell down to 7,054.98 on 10 March 2009 – massive asset bubbles will do that.
But we haven’t had one of those and so I think it’s reasonable to expect we will pass our old all-time closing high of 6828.70. We are now [as of Tuesday] at 5338.10, so we’re still 1490.6 points away from that level, while the S&P 500 in New York is at all-time highs!
So how come?
There are two groups of reasons — Australian and American.
The Yanks saw their greenback depreciate big time while our currency appreciated. This helped US businesses gain export markets, while others were able to beat foreign importers. If you holidayed in the USA during or after the GFC and whooped it up on the high Aussie dollar, then you should get this point.
Meanwhile, US official interest rates were taken down to virtually zero, while our rates were kept higher for longer by a too cautious RBA, though we did have a mining boom going on that kept rates and the currency too high.
America also had Fed boss, Ben Bernanke, who threw money at the US economic problem with QE1, QE2 and QE3, which not only has fuelled US consumer demand but fired up the stock market to all-time high heights.
The Americans also have a very flexible economy, where wages are already low and work practices help productivity and, therefore, lower costs. And when you throw in a weaker currency, this affords the economy a big competitive advantage. And we’re the opposite – our wages are relatively high and our currency made them even higher. Throw in our work practices and, once again, you can see why many of our companies’ bottom lines haven’t been great, explaining why our stock prices have been slow to kick after the GC slump that took stocks down by around 50%.
The different central bank policies – USA compared to Australia – go a long way in explaining why our stock market has lagged the Yanks.
But that does not end our comparison explanation of why we’re lagging the Yanks on the stock market rebound.
Problems to fix
Ironically, we did not go into recession but the Yanks and others did, which means we did not have as much to worry about. I think that has limited our repair job of this economy – our work practices, our tax system and even our leadership.
I would argue that Labor’s leadership squabbles, and its anti-business demeanour, did not help business confidence. Objective NAB business surveys showed this.
Carbon and mining taxes were not helpful, with both Qantas and Virgin Australia revealing the mega-cost impost of the tax on carbon. Qantas says the tax would be $118 million a year and this came as it announced a $235 million loss and the plan to cut 5,000 jobs.
Not helping us has been the recent China slowdown and its impact on iron ore and coal prices. Also, our banks, which make up about 30% of the stock market index, have done a hell of a lot of the work to get our index to where it is now. But they need support from all the other companies that have been badly affected by the high currency, our relatively high interest rates and low economic growth rates in the last two years of the Labor Government.
All the above negatives hit earnings and act as a lid on share prices defying gravity.
I do worry that as the Yanks are in an all-time high territory that their stock market might start falling before we get past our all-time high. However, Janet Yellen doesn’t think rates will rise in the US until mid 2015. I reckon, if history can be trusted, that we’d have to see a couple of years of rising interest rates before we saw another Apocalypse Dow crash.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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