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Market prices indicate economic performance

That market prices indicate economic performance has once again proven correct in recent share and bond market movements: watch the move in market prices for a particular sector and the economic performance for that sector will most likely take that path within 5 to 9 months.

Since early March (around 9th) this year (2009), the US and Australian equity markets have risen by more than 50% (at time of writing): whilst a significant portion of this growth is because of a massive over-sell taking prices unreasonably low, there are clear signs that the economy is improving – both in the US and in Australia.

In Australia this improvement has been reflected in the decision by the Reserve Bank to increase official interest rates from the beginning of this month – we were the first Western economy to take this action and the commentary around it suggests that growing economies in Asia are leading to an improvement in the profitability of Australian enterprises (particularly those who are engaged in supply arrangements with China and other Asian economies).

Whilst the improvement in the US economy appears to be driven mainly by government fiscal stimulus, there is a reduction in the rate of Unemployment, an increase in manufacturing activity (to some extent, replacing diminished inventories), some increased business and home lending activity and an anticipated third quarter of reporting season ‘surprises to the upside’.

Market prices indicate economic performance, so…

There is an expectation that the current rally might falter some time soon. If that does transpire, we expect the ‘correction’ to be of the order of ten to fifteen percent – which would leave the ASX All Ords up by still around 30% off the March lows. Sources we have read and heard suggest that if such a correction occurs it will trigger a further rally that will run for several months.

Continuum Financial Planners is monitoring the comments around these prospects and will guide clients through the phase as best suits their situation at the relevant time.

Clients will be familiar with the fact that we encourage formulating an investment strategy, reviewing that regularly – and sticking to the strategy whilst ever your personal circumstances prevail, regardless of the short-term vagaries of the equities markets. Most of us are invested for at least the medium-term (four- to five-years) or the longer-term and so the short-term movements of the market should be analysed to determine what they are saying about the potential in the economy. Short-term ‘shock’ variances should be discounted when reviewing longer-term investment strategies.

If you would like a review of your investment strategy and/ or portfolio, please contact us to arrange a meeting with one of the advisers at Continuum Financial Planners Pty Ltd.

(Originally posted in October 2009, this article has occasionally been updated/ refreshed, most recently during January 2020.)

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