Could the long awaited ‘Boom Phase’ be nigh?

A simple guide to understanding economic and market cycles

The Australian sharemarket is putting in a consolidating performance so far in 2017, with the All Ordinaries Index sitting at 5,975 points at the time of writing. The sharemarket has a 52 week high of 5,880 with the US Dow Jones recently breaking through an all time record high of 21,000. There is much more anecdotal evidence in Australia as to why the Index now has the best chance to rise above 6,000 over the course of 2017 and then head towards and above the previous all time market high of November 2007 when it reached 6,800.

In the 142 year history (1875) of the Australian sharemarket, after every ‘Boom’ there has been an inevitable ‘Bust’. Some of these ‘Busts’, like in 1987, have seen the market decline by up to 50% in a very short timeframe. In November 2007, the decline was also 50% from the peak (6,800) of the market however the bottom of the market wasn’t reached until much later in March 2009 (3,109).

The one thing that history does tell us is that after every ‘Boom’ and ‘Bust’ the market has always worked its way back to its previous high and then surpassed it. This has occurred over every cycle except the one we are in at the moment. In November 2017, it will be 10 years since the current all time market peak was achieved. The inevitable question to ask is will we reach the previous high of 6,800? Probably not this year but 6,000 is a real possibility by calendar year end 2017 with the previous all time high reached and exceeded in late 2018.

A stellar round of half yearly performance results, increased company dividend payments, coupled with a rise in commodity prices over the past 12 months assisted in lifting the sharemarket during the reporting season up until 28th February to a high of 5,863.

According to Managing Director of Bourse Communications and Investment Clock expert, Rod North, triggers likely to send the index higher for the remainder of 2017 and into 2018 include the sustainability of company earnings, potential for increasing dividends for the full year to 30 June 2017 and then the subsequent periods to 31st December 2017 and 30th June 2018.

Mr North says, “Coupled with commodity prices staying around the current levels, a lower exchange rate and a low cash rate of 1.5% to 2% create almost the ideal conditions for many companies to grow their businesses both organically and strategically.”

Where are we? We are still around 17% below the record market high achieved in November 2007 of around 6,800 points.

Mr North notes, “Frustratingly after nearly 10 years, it is certainly taking some time to achieve this in the current cycle. We are now in the tenth year of the market rebuilding process since the index high point was reached.”

So will 2017/18 be the years that we finally hit the ‘Boom Phase’?

It often takes years (five to seven) to get to the Boom Phase of the cycle. Because of the digital age and the power of the information age, a revolving door of country leadership on a world scale, the old norms of a cyclical market have been rewritten for the 21st century.

Mr North advises that when we get well into the ‘Boom Phase’, between 11 o’clock and 12 o’clock, all the usual signals are there to tell investors they are on borrowed time. This is a time of maximum optimism, a feeling of real and sometimes imagined wealth, where investors have accumulated significant assets and have an attitude that favourable conditions will continue indefinitely. We are not quite there yet (9 o’clock) but could be just about to enter the early stages of the’ Boom Phase’ that could last for 18 months to 2 years.

We don’t actually reach the Boom Phase on the Investment Clock until we get to 6,000 points on the All Ords and then surpass the all-time market high of 6,800 reached in November 2007.

Mr North says, “I believe the Investment Clock is just at the beginning of 9 o’clock, towards the end of the recovery phase, and creeping towards the start of the boom phase.”

Following a string of good company results and a rise in commodity prices, the future is starting to look brighter, but how can we be sure that it really is time to invest our hard-earned money and how do we know where we are in the investment cycle?

While sharebrokers and analysts might argue about where we are exactly, when looking at the Investment Clock, most will agree that it takes between seven and eleven years for the sharemarket – and the Clock – to run full cycle. As we’ve passed the Recovery Phase through 6 o’clock to 8 o’clock, we should start preparing ourselves for the unpredictability yet rewards that can be delivered during of the Boom Phase. This means that if you’re considering buying shares, you better seek financial advice and assistance to see how you can capitalise on opportunities.

According to Mr North, a great deal of care and analysis needs to be undertaken in selecting appropriate shares to invest in particularly given the changing nature of companies influenced by the power of disruption and the influence of technology in the market.

Mr North notes, “A good example of this will be the consequences of the rumored appearance of Amazon in Australia and the effect this could have on the listed ‘bricks and mortar’ retail companies in Australia. This could be a repeat of the ‘rivers of gold’ that once powered two news icons but then disappeared for News Limited and Fairfax, as the advertising revenue for cars, real estate and job advertisements created new billion dollar companies resulting in a paradigm shift on how consumers engage in this area.”

It has certainly been a frustrating wait for the Boom Phase to get here, but as Mr North claims, “Now could be the time!” We are now in the tenth year of the market rebuilding process since the index high point was reached. Because of the digital age and the power of the information age, the old norms of a cyclical market have been rewritten for the 21st century. This next Phase is often characterised as a time of maximum optimism, a feeling of real and sometimes imagined wealth, where investors have accumulated significant assets and have an attitude that favourable conditions will continue indefinitely. We need to be very careful as this Phase matures.

At 9 o’clock the seeds of the recovery are now well and truly sown and as Mr North notes, with the Presidency of Donald Trump heralding a large rise in the Dow Jones since his election, share prices have started to show the telltale Boom signs of gradual to rapid increase, with a hike in commodity prices and overseas reserves being rebuilt.

This entering of the Boom Phase means that we have moved beyond the difficulties of 8 o’clock, where companies were forced to become leaner and increase productivity. These measures and the slowly improving economy were part of this cyclical process and have translated into increased company profits, which worked, as expected, to gradually stimulate the recovery of share prices.

Mr North wisely advises, “While good profits can be generated from acquiring shares before they list on the sharemarket, it should be remembered that the sharemarket is a volatile and uncertain beast. Booms come and investors can accumulate great wealth. Booms disappear and can quickly wipe-out investment value. Keep your head while all those around you lose theirs.”


9 O’Clock

The seeds of the recovery are now sown and eventually share prices will rise as un-employment, which is often regarded as a lagging economic indicator falls. Share prices move through a period of gradual increases from 6 o’clock until about 11 o’clock as commodities increase in price, overseas reserves are rebuilt and money becomes easier, subsequently property again becomes an attractive investment opportunity.

10 O’Clock

The improving economy leads to more aggressive market highs. A frenzy of interest and speculation begins, marking the beginning of the end of the recovery phase, which peaks when the economy is booming and everyone believes the good times will never end, as overseas reserves continue to rise.

11 O’Clock

More spending on government projects and infrastructure occurs in this phase, to create jobs, which increases the demand on private sector businesses. This in turn results in employment of more staff to cope with increased production needs. Lower interest rates then prompt businesses to borrow and invest in capital projects. Well before the Clock strikes midnight, wise investors have exited shares and are looking for the next investment opportunity.

8 O’Clock

During this time, companies are forced to become leaner and increase productivity. These measures and the slowly improving economy translate into increased company profits and this gradually stimulates share prices to recover. Investors who come into the market at this level often see excellent gains in the years ahead.

7 O’Clock

A recovery from recession begins with increased government spending and a sustained easing of interest rates. Interest rates fall to historically low levels and eventually a point is reached where long term investors see value in the market and start to accumulate the better performing shares – often you don’t need to look any further than the Top 50 companies for investment selection. With a lower demand for money and interest rates falling the economy is stimulated and share prices begin to slowly rise. Cash is no longer King and the value net of inflation begins to erode.


6 O’Clock

6 o’clock marks the peak of a downward swing in the economic cycle. Investors are now either too scared, or cannot afford to borrow money and in response, interest rates slowly start falling. Individuals are now trying to pay off debt and spend less where they can, as well as trying to keep their jobs. A severe contraction in the labour market is often evident in this phase of the Clock. This can exacerbate recessionary deepening, unless correction through government fiscal and Reserve Bank monetary stimulus, and the return of business confidence becomes apparent.

5 O’Clock

Poor business confidence means that new capital ventures are postponed and Initial Public Offerings become a thing of the past. This is a time when capital is near impossible to raise and banks are not lending. Less spending and higher interest rates result in lower demand, which results in less production. Consumer confidence is at a very low level with demand for goods and services coming under enormous pressure. With fewer sales there is a squeeze on earnings, resulting in profit downgrades; and economic rationalisation becomes a hot topic in the boardrooms. The economy slows to the point where productivity stalls and then declines. When this happens for two consecutive periods the economy is said to be in a recession.

4 O’Clock

Decline into recession begins as business confidence starts to fall and consumers stop spending. Investors find little value in either shares or property and with impending trouble on the horizon fixed interest securities and cash become popular again – Cash is now King. A flight to quality assets occurs to protect what remains of an individual’s wealth. Often the gold price escalates at this time as it is seen as a store of value against worsening economic conditions. The dollar can also come under pressure to find the right level of adjustment in line with the prevailing economic ill winds relative to the rest of the world.


3 O’Clock

Before the Clock strikes midnight, savvy investors have exited shares and are looking for the next opportunity, having realised that there is likely to soon be a correction in the market. 3 o’clock sees the realisation of this correction and the consequences that will inevitably follow. Subsequently, more people are selling shares within this phase and the lack of demand triggers a sell off, a slump in share prices occurs and coupled with falling commodity prices the decline accelerates. High interest rates, still persisting at the beginning of this cycle, slow the economy and lead us into the beginning of the recessionary phase.

2 O’Clock

The rapid growth of the property and sharemarket cannot be sustained for more than a few years and eventually the economic slow down becomes apparent. Interest rates continue to increase until it is no longer viable for purchasers to continue investing in property and soon supply outstrips demand. As interest rates rise companies find it harder to make profits and this, combined with the booming property market and the fact that fixed interest investments now seem more attractive, causes share prices to begin to fall or at least plateau.

1 O’Clock

As property purchases are primarily funded by borrowing; the increased demand for funds causes the cost of funds or interest rates, to rise. The Government recognises that the economy is overheating and introduces measures to enable a ‘soft landing’, by increasing interest rates to flatten demand by consumers. Often the inflation bogey can rear its ugly head in this period and monetary policy in the form of interest rate increases can be used to keep it in check. If the Reserve Bank over corrects in this period by raising rates too quickly and too high, it can cause the market to come to a grinding halt.


12 O’Clock

Boom Time is a period of greed and excess. Consumerism is at its most extreme, full employment provides for maximum optimism and a feeling of real and sometimes imagined wealth exists, where investors believe that the favourable conditions will continue indefinitely. A whole range of new players come into the sharemarket at this level, and often regret having little or no knowledge, relying only on what others have told them- that sharemarket investment ‘is easy money’. Smart investors get out on the way to and at the top of the boom by taking their share gains and moving into real estate as part of a longer term wealth creation strategy. At this stage of the phase, the rapid increase in the demand for real estate often pushes demand above supply and results in an increase in property prices. Property prices may rise well above real value and can come back to bite you later, if you have excessive gearing.