The Australian indices have recently made new all-time price highs, convincingly surpassing the 2007 peak. So, is the market overpriced? And if so, are we due a market correction?
To the first question, there is no clear answer. The market pendulum swings from one extreme to the other, and it is often only possible to conclude that the market is “cheap” or “expensive” at the extremes. To us the evidence suggests that we are not at one of the extremes, in which case it would seem wise to have exposure to equities. How one should be invested, by strategy, asset class and investment philosophy might be a more sensible question to ponder.
To answer the second question in relation to the likelihood of a market correction requires a forecast that is impossible to accurately predict. As the saying goes, “forecasts may tell you a great deal about the forecaster, but they tell you nothing about the future”.
Why are investors concerned? The bull market has, according to many commentators, been going strongly since 2009. Technically a bull market is defined as a period of market growth without a 20% decline. Actually, since 2009 there have been three significant corrections in both the Australian and USA stockmarkets, two of which have been in excess of 20%, as shown in the charts below.
This might suggest that there have been a number of economic cycles in the ten years since the 2009 lows, but that they have been significantly less severe than the Global Financial Crisis. In Australia, there was a resources slowdown in 2011-2012, a mining and energy infrastructure slowdown in 2015-2016 and the property market slowdown in 2018-2019. All were accompanied by market corrections. However, these economic slowdowns have been considered minor, and as a result have not been viewed as interrupting the improvement in the stockmarket since 2009.
To the first question, there is no clear answer. The market pendulum swings from one extreme to the other, and it is often only possible to conclude that the market is “cheap” or “expensive” at the extremes. To us the evidence suggests that we are not at one of the extremes, in which case it would seem wise to have exposure to equities. How one should be invested, by strategy, asset class and investment philosophy might be a more sensible question to ponder.
To answer the second question in relation to the likelihood of a market correction requires a forecast that is impossible to accurately predict. As the saying goes, “forecasts may tell you a great deal about the forecaster, but they tell you nothing about the future”.
Why are investors concerned? The bull market has, according to many commentators, been going strongly since 2009. Technically a bull market is defined as a period of market growth without a 20% decline. Actually, since 2009 there have been three significant corrections in both the Australian and USA stockmarkets, two of which have been in excess of 20%, as shown in the charts below.
This might suggest that there have been a number of economic cycles in the ten years since the 2009 lows, but that they have been significantly less severe than the Global Financial Crisis. In Australia, there was a resources slowdown in 2011-2012, a mining and energy infrastructure slowdown in 2015-2016 and the property market slowdown in 2018-2019. All were accompanied by market corrections. However, these economic slowdowns have been considered minor, and as a result have not been viewed as interrupting the improvement in the stockmarket since 2009.
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Human nature tends to result in the expectation that what has happened recently will occur again soon. A great irony is that this negates the likelihood of this occurring because it changes behaviour. When to expect the next Global Financial Crisis, or a similar stockmarket meltdown, is a favourite subject of conversation. The fact that it remains fresh in the minds of many market participants most likely results in more cautious overall investor behaviour, therefore reducing the likelihood that there will be sufficient reckless behaviour to create the reconditions for such a decline until such lessons are forgotten by the majority.
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When the market or particular sectors are compellingly cheap against the historical averages, it would seem sensible to increase one’s exposure to the market. If sentiment is particularly cautious this should also act as a bullish indicator for investors. When stocks or sectors are expensive compared to history or other asset classes, caution is warranted, particularly in the presence of overt optimism or euphoric behaviour by market participants.
The very fact that many are questioning whether now is the time to sell, might well be a counter indicator signifying broad discipline in relation to exposure to the market.
The very fact that many are questioning whether now is the time to sell, might well be a counter indicator signifying broad discipline in relation to exposure to the market.
Terry Panigiris, Angie Menendez, Franciny Lima and CBD Corporate Financial Centre Pty Ltd t/a CBD Advisory are Authorised Representatives of Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 | AFSL 230323 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.