Almost everywhere you look, someone is warning about a crash.
The Age and Sydney Morning Herald warn you about market volatility almost every day.
A glance at Bloomberg, the Wall Street Journal, or Financial Times will reveal similar worrying stories.
Heck, look at the ads in this eletter. Chances are we’re using fear in some way to sell a newsletter subscription.
But despite all the fear, how has the Aussie share market performed this year? Well, it hasn’t been great. But it hasn’t been a disaster either.
And according to one controversial economist, allowing fear to set the agenda for decision making this year could be a big mistake…
It has been eight years since the last major stock market crash.
And it feels like every day since then, someone has warned that another crash is imminent.
So far, that has proven to be wrong. Sure, stocks have moved up and down. On occasion, quite wildly. But it’s fair to say that most markets haven’t seen a market crash on the scale predicted by some.
Will a crash happen one day? Of course it will.
History shows you that after every major bull market, a bear market follows. This bull market will be no different.
The only question is when will it happen?
Money on the sidelines
According to controversial economist and colleague, Phil Anderson, don’t expect a crash (in anything) anytime soon.
As he recently told subscribers of his Cycles, Trends & Forecasts service:
‘Commonwealth Bank [ASX:CBA] released its full-year report last month. There are a couple of other things we can glean from the report.
‘Currently, Australians are growing their cash holdings.
‘This would suggest there is plenty of money on the sidelines that can enter either the share market or the property sector.
‘As far as the general picture goes, CBA also noted that 77% of its home loan clients are paying ahead in advance. That’s by 31 months on average (including offset facilities).
‘That tells you a lot. CBA clients are two and a half years ahead on their home loans. Aussie house owners know what they are doing (sort of) and are voting with their feet.
‘The Sydney Morning Herald reported on August 29 that NAB is seeing a similar dynamic at work. Its customers were nearly 15 months ahead of their minimum repayments — up from 12 months in 2012.
‘This is thanks to the RBA cutting interest rates.
‘The tax system forces you to do this. Buy a house and pay it off as quickly as possible. Live in it a while and take the capital gain tax free.
‘About the only thing they could do to improve it is to have someone else pay off the interest somehow.
‘Just like a bank does.
‘Anyway, it tells me that house prices are nowhere near extreme yet, if a whopping 77% of CBA clients can be way ahead on their repayments.
‘This cycle is only just getting underway.’
As we say, it’s a controversial view. And what could go for house prices, could go for the stock market too.
Aussie stocks set to boom
Low interest rates pushed up asset prices in the US, UK, and some European countries. It has also pushed up asset prices in Japan.
Since the stock market low, key foreign stock markets have recorded the following gains:
- UK FTSE 100 index, up 98%
- Germany’s DAX index, up 187%
- US S&P 500 index, up 219%
- Japan’s Nikkei 225 index, up 137%
As for the Australian stock market, it’s up a relatively poor 73%.
But remember, Australia hasn’t had interest rates as low or as for long as these other economies.
While a period of sustainably low Aussie interest rates doesn’t guarantee a new stock market boom, it’s by no means out of the question.
And if Aussie homeowners really are far ahead with their mortgage repayments, it’s also possible that a sustained recovery in stock prices could draw more investors and more money back into the market.
We’ll agree, it’s a controversial view. And it’s not without risk.
But, as Phil humbly acknowledges, he was one of the few economists who spoke out in 2008 and 2009 to say that the crash was over and asset prices were set to rise.
On that count he was right. Will he be right again this time?
PS: Phil and his right-hand man, Callum Newman, write about and analyse the key trends effecting asset prices in their monthly newsletter, Cycles, Trends & Forecasts. It’s a unique newsletter amongst our services, but once people try it out, almost every one of them immediately sees the value. To try it out for yourself, go here.