Lets start off with some very obvious Australian fundamentals.
1) Australia's economic life blood is it's housing market that directly and indirectly provides jobs for a majority of Australia's population, and the property market peaked in 2017 contributing to a weaker economy instead of a stronger economy for the first time in more than two decades.
2) The RBA has officially started its easing cycle before it even had a chance to raise rates. Rates should have been rising along side the property market since at least 2015 to stop the economy from overheating, they weren't! The reason is because higher rates would have strengthened the Aussie Dollar and hurt our exports to China right as our mining boom was coming to an end. This means we are now weakening into record low interest rates instead of weakening into normalized interest rates (which is usually the case). The fact we are weakening into record low rates is economically unheard of, it denies us the ability to fight an incoming recession with any meaningful policy tools.
3) Australia has the highest private debt levels in the developed world. This basically means Aussies are up to their eye balls in Mortgage debt and luxury car loans fueled by the mania in property over the last two decades. This is also another reason we are weakening even while interest rates are at record lows. It doesn't matter how low the RBA cash rate is if debt serviceability is unmanageable, and the higher the level of private debt the lower the level of interest Aussies can bear.
4) Australian wages are stagnant, having barely risen over the last decade while under the surface the cost of living keeps increasing. It doesn't take much now to push someone over the edge into financial stress especially given the level of debt.
Now that that's out of the way lets talk about what caused this rally in the ASX to occur while other global markets are falling or trending sideways. Why is Australia Partying while the rest of the world are getting noticeably concerned about the global economic outlook? Australia's center-right prime minister was re-elected and because he was viewed of as better for the economy than the alternative the markets took this as a positive, even though in reality it just means business as usual. The post Election hype will wear off as it always does.
So if the Australian economy is weakening and the ASX is due for a reversal and subsequent correction fundamentally speaking as the population comes to terms with incoming recessionary forces, where is the top of this rally. As you can see in this chart we are in for a possible decade long double top losing momentum and reversing around the same area we did back in 2008 during the last global financial crisis at $6800 AUD keeping us in this channel. A break below this channel however would not be pretty so we will revisit it if and when we get there.
Disclaimer: This is not financial advice merely my opinion.
The ASX 200 index had a P/E of 14.9 back at the top of 2007. Now its higher at 18.5 for the same index value of about 6670. The ASX 200 is clearly overvalued now even with lower interest rates. The chart looks better on a log linear scale. The eps is lower today compared to 2007 which creates the question why is the index so high on lower earnings? I think the DJIA and S&P500 indices are ripe for a fall as they are overvalued too. Trump has been making comments about tariffs on European car manufacturers, I think the trade wars with China, Europe and other countries are only just getting started, these markets are so high they are ripe to fall on any bad news.
The S&P500 index is marching out a broadening top formation, this formation appeared in many stocks in 1929. Is this a harbinger for things to come?
The S&P500 index is marching out a broadening top formation, this formation appeared in many stocks in 1929. Is this a harbinger for things to come?