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The All Ords has Finally Surpassed the All-Time High of 6,873!

Why an Index of 7,000 a Real Possibility

It’s a time to take extra caution as we advance into the latest cycle and “keep your head whilst all those around you lose theirs”

by Rod North, Founder & Managing Director, Bourse Communications

What a rollercoaster ride the Australian sharemarket has been on over the past 12 months! With the All Ords peaking in August 2018 following a positive month on both Wall Street and the ASX, investors were suddenly spooked by the political turmoil in Canberra, and the All Ords lost $30 billion in one week to 23rd August. Poor sessions on Wall Street saw US shares sold off heavily ahead of the start of the earnings season, and investors in Australia locked in gains seeing the ASX drop alarmingly through October and November. From the All Ords beginning 2018 at 6,167, it peaked at 6,481 on 30th August and came to a bleak end closing the year out at 5,709 on 31st December.

Since then, the Australian sharemarket has been actively recovering from the market volatility and unpredictability that it encountered over the past year; which suggests that I was sanguinely on point when proposing late last year that investors should be cautiously optimistic for 2019.

In the 143-year history (since 1875) of the Australian sharemarket, after every boom there has been an inevitable bust. Some of these busts, as in the 1987 sharemarket crash, saw the market decline by up to 50 per cent in a very short timeframe. In that case, it was virtually an overnight drop that took the market by complete surprise. Other crashes took longer, like in November 2007, it took until March 2009 to finally reach the bottom of the market.

On a close analysis of the last 100 years of the sharemarket performance, it can generally take between five to seven years to get to the ‘Boom Phase’ of the cycle. Because of the information age and the power of the digital age, and a revolving door of lacklustre country leadership on a local and world scale, the old norms of the nature of the cyclical market have been rewritten for the 21st century.

We know that there are certain signs to look for that indicate we are in ‘Boom Phase’ of the Investment Clock cycle, which, in turn, suggests the All Ords Index is set to rise to even loftier heights. And if we were in any doubt, the past six months have made it abundantly clear that we are now in the ‘Boom Phase’ of the Investment Clock.

In November 2007, the market peaked at an intra-day high of 6,873, and a closing high of 6,853, then dropped through the Global Financial Crisis in 2009/10 to a low of 3,109. Since then, the market has slowly risen and yesterday it finally reached and surpassed the November 2007 closing high, ending the day at 6,862. And this morning, 25th July 2019, the market has finally reached and surpassed the all-time inter-day high of 6,873.

There is now enough anecdotal evidence to suggest that the All Ords will to continue to move higher over the remainder of 2019 and into 2020, with the prediction that the market is set to reach 7,000 points by year’s end.

And here’s why:

2019 Half-yearly company earnings results

Of the companies which reported half-year results this February earnings season, 93% posted a profit.Source: CommSec

The second half of 2019 is also shaping up to continue a trend of improved earnings and profitability that will play a part in driving the sharemarket higher.

Increasing dividend payments

Overall, around $29.4 billion will be paid to shareholders over the February-June period, up from $26 billion in the August 2018 reporting season.Source: CommSec

Rise in commodity prices

Over the past year, the index has increased by 12.6 per cent in SDR terms, led by higher iron ore, LNG and, beef and veal prices. The index has increased by 18.3 per cent in Australian dollar terms.Source: Reserve Bank of Australia

Rise in overseas reserves

Foreign Exchange Reserves in Australia increased to 79919 AUD Million in May from 75668 AUD Million in April of 2019.Source: Trading Economics

Lowered Interest Rate

On 4 June 2019 the RBA lowered the cash rate by 25 basis points from 1.50 per cent to 1.25 per cent. This was the first official interest rate move in almost three years. The following month, the RBA again dropped the cash rate by another 25 basis points, taking it to a record low of 1.00 per cent.

(Source: Reserve Bank of Australia)

With the cash rate at this level and likely to go lower, the sharemarket will be a major beneficiary as investors chase yield.

Concerns from 2018 resolved:

Banking Royal Commission
On 4 February 2019, Commissioner Hayne released the final report on The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Political uncertainty in Australia
On Saturday, 18 May 2019 the Liberal/National coalition won the election with a strong mandate to govern, 77 seats to ALP’s 68 seats. This removed the uncertainty of which party would govern Australia for the next 3 years and confirmed the status quo. Investment markets don’t like uncertainty.

By winning what was seen as an unwinnable election, the unexpected leader has cemented his authority over the Liberal Party, giving him the muscle to end a decade of instability that has seen a revolving door of prime ministers.Source: Reuters, 19 May 2019

On an International front:

Political uncertainty in Europe
The EU and UK have agreed a further delay to Brexit until 31 October. On 7 June Theresa May stood down as prime minister, and on 23 July, Boris Johnson, who campaigned for the UK to leave the EU in the Brexit referendum, was elected as the party leader and UK’s next prime minister.
With Boris Johnson as the new UK prime minister, it now seems most likely that the 31 October Brexit deadline will be met.

Wall Street and US/China trade war
With Trump officially launching his 2020 re-election campaign on 18 June 2019, it seems most likely that it will be in Trump’s best interests to negotiate a trade deal with China to keep his voters confident is his ability to create a strong economy.

Remember, however, nothing is certain in today’s unpredictable international political climate, with the risk of a “Captain’s call”, sending markets into a flurry of chaos and volatility, only ever being a Tweet away.

With the All Ords having reached a new record market high, we are mid-way into the ‘Boom Phase’ of the Investment Clock.

Between 10 o’clock and 11 o’clock on the Investment 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.

We are now in the ‘Boom Phase’ of the Investment Clock, meaning that the seeds of the recovery are now sown and given rising and sustainable earnings, share prices will rise as unemployment falls, commodities prices continue to increase, overseas reserves are rebuilt and property investment remains an attractive investment opportunity given gains achieved from sharemarket investment. However, this is a time where we need to become extremely cautious because at some point, in the mature stage of the ‘Boom Phase’, we will enter the ‘Greed’ cycle.

Now that we are in the ‘Boom Phase’, between 10 o’clock and 11 o’clock on the Investment Clock all the usual signals are there to tell investors they are on borrowed time.

Remember that earnings, earnings, earnings will always drive share prices up. As we advance further into the ‘Boom Phase’ don’t listen to advice on shares from the taxi or Uber driver, the tennis coach or the conversation at a dinner party. Often these amateur share tipsters are providing you with information that’s like a stick of gelignite with the fuse lit and set to explode at some point. You just never know how long or short the fuse might be.

To leave you with a final thought, here are some words of wisdom given to me by my father (a 40-year stockbroking veteran), when he was entering into the hustle and bustle of the sharemarket,

“Always remember to keep your head whilst all those around you lose theirs.”

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THE BOOM PHASE BEGINS

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.

DEPTH OF THE RECESSION – THE RECOVERY PHASE BEGINS

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.

THE RECESSION PHASE BEGINS

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.

TOP OF THE BOOM – THE SLOW DOWN PHASE BEGINS

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.