1 November marked the five year anniversary of our share market’s last high point (S&P/ASX200 Accumulation Index) and with November also marking five months in a row for positive share market returns it seems like something is in the air. One thing is certain, the ECB’s announcement of its buyer of last resort program (OMT) seemed to be a game changer and may provide the backstop the market needs to climb back above that five year level. This more positive outlook saw the Reserve Bank of Australia keep rates on hold at 3.25% at November’s meeting.
Below is a chart that shows the close relationship over the last few years between our dollar and our share market. Right from the announcement of the OMT on 2 August (shown as a line on the chart below) that relationship changed - we saw the Australian dollar weaker on lower interest rates, commodity price weakness and doubts over China, yet Australian stocks remained in favour. It seems that the world, having fallen in love with our AAA rated Bond market, is now enamoured with our higher yielding REITs and shares. It could also point to more institutional buying of shares in our market.
So perhaps if history is any guide, and the "fiscal cliff" is managed, we have reached that historical point where there is enough confidence for markets to rally over the next two years. When this happened in 1973 and 1987, bear markets rallied 48% and 72% over the subsequent 18 months in terms of the price index.
Indices:
The Australian All Ordinaries Index has moved down decreasing -118 points (or -2.6%) since closing last Friday to 02:10 pm today.
The rest of the world as measured by the MSCI index decreased -14 points (or -1.5%) in A$ from closing last Friday to end of trade Thursday.
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