Make that seven up weeks in a row! The S&P/ASX 200 index posted a 90 point, or 2.1%, gain last week, making it the seventh consecutive up week on the market. The index is currently up 7 points today to 4319, a record for our market and up over 20% for the financial year to date! Who would have thought it when the market was languishing in early May?! In fact, the market is up approximately 10% since then… a timeframe of only seven weeks!
So why the rise? Who the hell knows! Reserve Bank governor Ian Macfarlane last week made some positive comments regarding the state of the economy, which never hurts. Strong base metal prices enabled resource heavyweights BHP Billiton (BHP) and Rio Tinto (RIO) to push things along last week, despite the financial sector dragging the chain. Most of the banks were off last week after what has been an impressive month for the sector, with the big news being CEO David Murray’s departure from Commonwealth Bank (CBA) and his replacement by Air New Zealand (AIZ) chief Ralph Norris. The approximately $40m payout to David Murray ensured that piece of news was bigger than it otherwise would have been.
The most likely explanation for the huge rally of late is that the sell off in April/May was well over done. Panic took over as over geared investors panicked and over bought sectors (such as retail) retreated. Despite the rally many stocks have not recovered. The rally has been rather narrow and selective.
So what are the negatives in today’s environment, given we have the positive of a surging stock market. Well, the oil price is within striking distance of US$60 a barrel, which should add some inflationary pressures to the economy. This is detrimental to consumer spending, and obviously puts the squeeze on companies that use oil as an input, such as Qantas (QAN). We note that QAN’s fuel bill is set to rise by roughly $1bn a year if oil remains over US$50 a barrel, and so the company is seemingly preparing to undertake a cost cutting regime in other areas of the company to offset this problem.
Beyond those issues, perhaps the most obvious problem is that with the market surging like it is, it would take little in the way of disappointments come profit reporting time to rattle the market. This is, of course, unless market sentiment has swung back to a point where it ignores bad news… not that that’s a good thing. That often leads to a hot market that is susceptible to a significant fall (like April). We continue to hope for pull backs to provide us with great buy opportunities.
With the market in record territory, all we can do is try to not get carried away by the optimism. It’s certainly nice to see most of our stocks up, but it’s also important to remember how it felt when the market ignored good news and pessimism abounded… only a few short weeks ago. Let’s enjoy the good times, but stay vigilant.
