Welcome to Finance and Fury – Where are we at? Market has been going up –

Looking at a chart – March in 3 particular years stand out – 2008, 2009 and 2020 –

Why? They are each their own respective bottoms of the market after declines –

In this episode – March 2008, March 2009 and march 2020 – are we sitting at a similar position as 2008 or 2009?

  1. Share market gone up from its March 23rd low – some analysts are seeing similarities with the massive rebound that took place when the markets were emerging from the financial crisis 11 years ago
  2. Some market analysists saying that the ‘flattening of the curve’ in terms of COVID-19 and states slowly re-opening are all helping the market look beyond the current quarter
    1. Signs that the market is looking to ahead – 6 months, 12 months out –
    2. Or is it short term profit seeking behaviours?
  3. By the market in speculation terms is myopic – so are traders buying long or seeing this as a short term profit maximisation strategy?
  4. There has never been a significant portion of the largest economies in the world shuttered as well as other economies around the world shuttered – or what that would look like coming out of it – the domino effect is impossible to predict –
    1. So the market gaining in price now – i.e. looking ahead
  5. Those analysis have also prompted many forecasts as to what the shape of the economic recovery will look like
    1. A lot are forecasting a likely V-shape recovery in equities occurring – with likely a U-shaped recovery following with the economy – are closely watching for broader participation as a positive indicator for the markets.

 

Look at the historical Patterns –

  1. First march pattern – Going back to December 2007 –
    1. Market at 6,600 – then by march had hit 5,127 = a 23% loss
    2. By end of may – market had recovered back to 5,931 – rebound of 16% but still 10% lower from peak
      1. Pattern – loss of 1,527, then a gain of 804 points – this rebound in points terms is around 53%
    3. Then by July back down to 4,900 – about a 17% drop – hovered around there until September
    4. Then dropped to 3,800 in October – then rebounded to 4,350 in November – then by December had dropped back to 3,222 – new low
      1. Pattern – Loss of 1,100 from July to October, recovery of 540 in November, then a loss of 1,014 – saw a rebound of 50% then a decline by double the rebound
    5. Second March Pattern – Going back to December 2008 – new low of 3,322
      1. Saw the stock market gaining in confidence has shot higher for a second straight session as investors bet that President-elect Barack Obama’s plans to increase infrastructure spending will lift the economy back to health –
      2. Markets went back up to 3,800 by January 2009 –
      3. But then lost traction and went down to 3,145 by march 2009 – rallied after this until October 2009 –
        1. Patterns – markets went down by 1,014 – then went back up by 478 point – initially saw a 47% rebound – from the low in Dec 08 to Jan – then markets dropped again to a new low – drop of 655 points –
      4. Then from low point – markets went up until October 2009 when they stalled out again – went up and down and by mid 2011 was around the same level – about 5,000 – but by end of 2011 was down to 4,000
    6. Where we are at now –
      1. Markets went from 7,130 to 4,546 – large point drop within a month and a half – 36.24% drop
        1. Then by May they were 5,500, Now they are sitting at about 6,000 – 31.9% gain since the bottom
      2. Based around the larger retracement patterns in the 62% range, we aren’t quite there yet –
      3. Market would need to be around 6,130 to hit this point from the low
        1. Drop of 2,584 points, now had a rebound of 1,454 – equal to about 56% – another 130 points and we will see what happens
      4. Had no strong pull backs along the upwards movements – there has been a bullish breakthrough
    7. Markets aren’t easily predictable – but What this should at least illustrate – markets move up and down in times of uncertainty – when and by how much who knows – don’t have a crystal ball –

 

People say that these are unprecedented times – Differences between now and 2008 –

  1. Time – event of GFC versus this – what till take longer to recover from?
    1. Works against the V shaped pattern expectations of what the markets are currently on
  2. The nature of the collapse – at the root both were governmental policies in lending and guarantees versus lock downs
    1. Difference is the sectors impacted – the housing market and banks –
    2. versus employment at a larger level and the flow on effects of this
    3. Staved off at this stage – Gov stimulus policies – super withdrawals – $10.5bn – spikes in demand
    4. Long term – may not last
  3. Risk free rates – talked about this in the CAPM episode last week – but the cash rates and borrowing rates are low – can borrow and invest at low opportunity cost –
    1. Makes bubble situations or rebounds in markets more prevalent – but speculative based – purely for profit maximisation in trading – not in the actual performance of the companies that make up the market
  4. Amount of money being pumped into markets – QE programs and Central banking policies –
    1. Back in previous crashes – had very limited CB intervention – today we do
    2. Interestingly – going back further to the 1929 crash – markets dropped 50% very quickly – at the bottom saw massive CB intervention – not when compared to todays standards – but the market rallied over a 5-6 months period – went back up 50-60% – then went

 

How the market works –

  1. The worst was priced in initially – markets are liquid – and they freak out
  2. Hits a low point – people enter the market
    1. But this all occurred As announcements of shut downs start –
  3. But then recovers – it seems counter intuitive – before the actual announcements started
  4. There has been little in the way of truly positive news – restrictions are being eased –
  5. But speculation can give the perfection of false confidence in the financial markets – and real confidence is the key long term –
  6. Profit seeking versus The average investors –
    1. Patterns reflect demand for shares – demand spike at the 5,500 mark – could be the average investor entering the market – sadly these could be the ones who get burnt in this
  7. Initial institutional investors who got in earlier may Then move into Profit taking

 

On the fundamentals side – What is the share market – a speculative price instrument

  1. It doesn’t have too much with the fundamentals – but the perception of fundamental performance of the economy
  2. The market keeps going up – pricing in much better economic news than what is coming out –
  3. But the really really bad news seems to be over for now – but this has nothing to do with economic news of unemployment, GDP, etc – all the market cares about is profit

 

Back in April, much of the rally had been fuelled by mega cap companies, prompting a warnings about the narrow breadth of the market –

  1. With the ASX – the banks have finally had the rebound from people buying into these – so catching up a bit –
  2. A lot of Aus companies may be around the fair value level now that the market hit 6,000
  3. It still does have some base in expectations – expectations of pricing – prices and profit taking –
    1. Thus creating a self fulfilling prophecy when it comes to market declines – then – but back in at a lower point and then sell once the gains reach a desired level –
  4. Whilst the economy is tanking – the companies that make up most of the ASX are likely to benefit longer term – as they are a protected class – but that doesn’t mean their prices won’t go down from there –
  5. Again – the market is a speculative environment –
    1. News about the economy or pretty meaningless measurements to our everyday lives like GDP will effect the market – that is the distinction to make –
    2. What is bad for us can sometimes be good for the market and vice versa

Are we at March 2008 or 2009 –

  1. I would lean towards somewhere in between – why? The market does look forward and try to react first –
  2. But if it is pricing in good things in 6 months time – hence the trend up – smallest bit of bad news can buck the trend
  3. Even on trend upwards – downturns occur – the market will be volatile going forward – everyone is in the same direction doing the same thing – leads to a situation where large reversals can occur –
  4. Dramatic moves in the market
  5. FOMO is in play – seeing the market jump up by as much as it has in the past few weeks
    1. When FOMO kicks in it does continue for a little while –
  6. Right my strategy is patience – probably the key with the share market – after such a large rally – markets tend to take a dip as profit taking kicks in
    1. Definitely could be wrong – markets may be going up to 7k again –
    2. I still firmly believe that this rally is completely nonsensical from an economic standpoint, however it is rational if you consider the monetary environment as prevailing – CBs taking over and emotions of fear as well
    3. Long term – when it comes to personally investing – if you are looking to make a quick buck in the next 3 months from buying now – you may be burnt – but if you are buying shares for the next 10 years – it is still a good time to buy
    4. Again – in volatile uncertain times – when probability is in play – if you have a 50/50 chance of losing 50% or gaining 50% – expected return is $0
  7. Do an episode probably next week – Dig deeper into fears that are driving markets – fear of losing out but also fear of losing money – and what is driving fear

 

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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