Today’s Profit Watch is putting the periscope above the water line to check our bearings. Where exactly are we?
My take is we are in a bear market. That might sound ridiculous when you consider the big surge in the market since the bottom in March.
But some of the biggest market rallies in history have come in official bear markets.
You might be surprised to know that US stocks rallied 50% into April 1930 after the 1929 crash. Then they ground down into 1932.
I’m not saying the Aussie market will follow that script. But we can’t escape the reality that a lot of companies face falling earnings. And it’s ultimately earnings that drive stock prices higher.
Of course, we know that not all companies have this problem. For example, online retailer Temple & Webster is booming as people adjust to ordering homewares online.
And there are hundreds of small-caps that don’t make money anyway and can still generate you capital gains by hitting their business catalysts, whatever they may be.
But winners from COVID-19 are rare compared to the losers. That suggests the recent upward momentum in the market is going to be hard to maintain.
Here’s why I bring it up. I happened to be reviewing a book that was written during the 2008 crisis.
The writer noted that companies were pulling their guidance and that the market was ignoring ‘good news’.
We know companies have pulled their guidance since March and are unlikely to commit to anything in August either.
I don’t think we could say the market has been ignoring good news lately — goodness knows there’s been little…but stocks marched higher anyway.
But that’s what we have to be on watch for now. August is going to have a lot of surprises as companies report results worse than expected and some better than expected. The landmines will prove dangerous.
That’s another reason I expect the market to tread sideways from here. Investors are likely to become more wary the closer we get to these important announcements.
I could be wrong, of course, but that’s my current take. If I’m correct, however, it means we likely have a third phase of this bear market to go. Right now I suspect we’re in the second one.
What’s the third one? Traditionally it would be bankruptcies, distressed selling and capitulation.
Central Banks Coming to the Rescue
But governments and central banks are much more active today than ever before. Perhaps we can’t rely on history too much on this point.
We can see an example of this increased activism over in Western Australia right now.
The state government has come out and said it’s going to spend another $2 billion-plus to stimulate the economy. That takes the total juice to over $5 billion since COVID let loose.
It’s another reason my colleague and real estate expert Catherine Cashmore is excited for Perth property right now.
However, real estate related stocks face a lot of headwinds in the short term. It’s hard to see how they can really grow their business strongly in this environment unless they have a disruptive business model in some way.
Editor, Profit Watch
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.