Australian Economy

As anxiety runs high, here’s how the stock market can rise from the ashes to roar higher once more

The early week stock market euphoria is dissipating as we come to the end of yet another dramatic week for investors.

As of lunchtime trade on Friday, a week that started out with rumours of the imminent demise of Credit Suisse is ending with a solid gain for the S&P/ASX 200 Index (ASX: XJO), up around 4.7%.

GFC mark II averted, again.

I may have lost count of the number of times we’ve been on the brink of GFC mark II over the past 14-odd years. Like the crash of 1987, it will likely take several decades before it is largely erased from memories.

That said, we haven’t been without stock market crashes since 1987… apart from the many  “mini” bear markets we’ve endured since then, we’ve had at least four major bear markets — the dot com bust, the GFC, the COVID crash and now this inflation inflection. 

In hindsight, all were great buying opportunities, when viewed with a five-year plus time horizon. But at the time, as with now, they are very painful.

The most painful aspect is the unknown duration of a bear market. If you are anything like me, you’ll buy stocks on the way down, but have shot most of your bullets well before the market bottoms. Then it becomes a case of having to sell one cheap stock in order to buy a cheaper and/or better stock.

Stating the obvious, making two decisions – what to sell and what to buy – leaves more room for error. We’ve all done it – the stock we sold does better than the one we bought with the proceeds. Painful indeed.

More painful is selling out of stocks completely because…

a) you can’t stand the pain of watching the value of your portfolio drain away;

b) you think you’ll be able to buy back in later at better prices; or

c) something you read made you think there’s a further major stock market crash just around the corner.

Rather like the Credit Suisse rumours over the weekend…

Or the prognostications of serial bears like Jeremy Gratham and Ray Dalio who, despite their billionaire status made from the investing industry, have this year previously predicted markets will crash another 20-25%.

Let me remind you, despite their bearishness, they didn’t make their fortunes by taking out short positions on individual stocks. Fear sells.

And now, this Friday, we collectively pause as markets anxiously await tonight’s US jobs report. Good news on jobs will send the stock market lower because it will need interest rates to rise further to combat inflation. Bad news on jobs = good news for stocks. Here in Australia, we’ll see the fall out at 10am Monday when the ASX opens for business.

One jobs report will not make or break your portfolio. 

Your portfolio is likely already ‘broken,’ unless you sold all your tech stocks a year or so ago and piled the proceeds into coal stocks and lithium stocks like Whitehaven Coal Ltd (ASX: WHC) and Core Lithium Ltd (ASX: CXO). 

With the benefit of hindsight, how easy is this investing lark?

The cycle continues

Here’s just about everything you need to know about interest rates…

Interest rates are going higher still. They’ll likely go higher into the middle of next year. The pace of rises will slow, with the Reserve Bank of Australia already ahead of that game. Then, with inflation coming under control as the global economy screams to a grinding halt, central banks will begin cutting interest rates.

It’s called an economic cycle.

For the past 30-odd years, Australians have been largely immune to economic cycles. And this time around, although the economy will slow as higher interest rates take their intended toll, we’re not expected to fall into recession. The Lucky Country indeed.

The stock market looks forward, not backwards. It’s already looking past this coming economic slowdown, desperately looking for signs of when the economy might turn.

Stock markets begin to recover well before the worst of the economic news, like earlier this week when world markets went nuts.

That doesn’t mean we’ve necessarily seen the bottom of this stock market cycle. We’ll only know that in hindsight.

But with foresight, we might look today at some beaten-down dirt cheap stocks trading on attractive fully franked dividend yields, knowing this economic cycle too shall pass, and in the fullness of time, the stock market will rise again from the ashes, like it has done over the course of history.

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