Monthly economic and market review

May 2, 2024
Photo diagrams and graphs on the paper with a monthly calendar

The Australian All-Ords share price index rose 0.3% last week after falling 2.9% the week before. The index had been yo-yoing sideways since it escaped its three-year channel ceiling at the end of February 2024, but a fortnight ago had a big drop bringing it back within its previous channel ceiling. Read Percy Allan’s monthly economic market review.

My technical models show:

      • On short-to-medium-term trend analysis both the Australian All-Ords index and the American S&P 500 are bearish.
      • On medium-to-long-term trend analysis the Australian and US markets remain bullish.
      • The Coppock momentum indicators of both markets are positive. They turned up in negative territory early last year signalling the previous bear market was over.

Market Pullback

The Australian All-Ords share price index rose 0.3% last week after falling 2.9% the week before.

The index had been yo-yoing sideways since it escaped its three-year channel ceiling at the end of February 2024, but a fortnight ago had a big drop bringing it back within its previous channel ceiling. See chart below and Big Picture section later in this bulletin.

Rate Pessimism

First was the growing concern that both the US Federal Reserve and the Australian Reserve Bank may not cut interest rates until 2025 because their inflation fights have stalled. The strong rise in share prices since the beginning of last November was based on investor confidence that the US cash rate would start falling in March 2024 and be 1.5% lower by year’s end. Because investors thought interest rates would fall, they rebalanced their portfolios from low-risk cash and bonds into riskier assets such as shares that offer a better long-term return. With these hopes dashed, they are now switching back to defensive assets.

Wider War

The second reason for the market’s pullback was that the Gaza War could escalate into an Israeli Iranian war following the tit-for-tat attacks by each country after Israel bombed the Iranian embassy in Syria on 1 April. Adverse surprises such as runaway wars are known as “black swan” events. Investors tend to go from “risk on” to “risk off” on such occasions shedding shares for cash, gold, or treasury bonds as a safe refuge and that happened this time. However, war fears eased last week as both Iran and Israel declared they would take no further military actions for now. That buoyed global share markets on Monday and Tuesday.

Further Bad News

Like other global share indices, the All Ords started recovering last week as fears of an Israel-Iran war abated, and global business activity remained resilient but then on Thursday (when the ASX was closed for Anzac Day) two pieces of bad news saw the All-Ords relapse on Friday.

In Australia, the consumer price index surprised to the upside resulting in the futures market no longer pricing an RBA rate cut for 2024. In the USA, GDP growth slowed, and the GDP price inflation index accelerated raising fears that the economy might be returning to secular stagflation. America’s Core PCE price index result for March brought no cheer either.

Big Picture

Seven weeks ago, the All-Ords index finally escaped its straitjacket of see-sawing sideways below 7,900 since April 2021. Bulls were ecstatic saying this proved the share market had overcome its previous channel gyrations and was free to climb even higher. But the journey since then has been ragged, with the index retreating after each advance and after 10 April suffering a significant pullback to within its trading range of the last three years.

See next chart.

Bulls versus Bears

Bears say the All-Ords strong rally since the end of October 2023 could now end in a correction or crash since it was based on a false premise that the inflation fight was over so official interest rate cuts were imminent. Bulls claim the stalled progress on inflation is temporary since elevated interest rates should weaken the labour market thereby reducing wage push pressures on services inflation, the main bugbear. Bears retort that there is no sign that unemployment is rising sufficiently to stymie high wage demands.

Bulls point to the latest US GDP data which shows America’s economy is quickly slowing which should take the heat out of inflation and thereby allow rate cuts. Bears warn that the same data shows GDP inflation is accelerating so suggests America is slipping back into stagflation – higher inflation with weaker economic activity. If so, it presents the worst of both worlds since it would prevent rate cuts and depress corporate earnings.

Also, Australia’s latest CPI data points to higher inflation. If the March quarter GDP data proves dismal that too could raise concerns about a stagflation outlook. Bulls say that looking in the rear vision mirror is no guide to the future. The pandemic inflationary shocks are over, and a cooling US economy is welcome since it has been running too hot compared to other developed countries.

Economic Positives

American commercial bank reserves continue to trend up indicating rising liquidity in financial markets which should provide support for stocks and bonds. See chart below.

US Commercial Bank Cash Reserves

Source: The Patient Investor
In addition, global financial stress is absent suggesting no imminent credit squeeze. See following chart.

And Dr Copper (the price of copper which is a good barometer of world economic activity) does not signal a world recession. See next chart.

Market Risks

However, this is not to say the stock market won’t correct (fall by over 10% since its last peak). The All-Ords at its lowest point this month (the 19 April) was down 4.1% from its previous peak on the 28 Match. By comparison on the same date the S&P 500 was down 5.6% and the NASDAQ down 7.1% since their previous peaks. The reason for the US indices falling further than the All-Ords is that they are more IT heavy so are extremely sensitive to the prospect of higher interest rates for longer.

Though both the Australian and US markets are off their lows of the 19 April there is a risk that US stocks which look overvalued on the Shiller P/E ratio (see chart below) could undergo a major price revaluation if America returned to stagflation – low growth plus high inflation. Such a scenario would prevent rate cuts and hurt corporate profits.

An American stock market correction would impact other markets (including Australia) because Wall Street dictates investor sentiment globally.

Nevertheless, be mindful that the current Shiller PE ratio for Australia is below its historical fair value whereas that for America is way above its traditional fair value. See next chart. That means any correction (or worse still a crash) in Australia should be temporary whereas that in America could be long term.

But given the pickup in the US share market last Friday and the improved momentum (though still negative) of the S&P500 index in the last week it is quite possible that the present pullback amounts to no more than that and the US market (and with it other developed markets) resume their short-to-medium term bull run.

Trend Analysis

Australia’s Market

On short-to-medium-term trend analysis, the All-Ords index turned bearish on 17 April since its red 10-day trend line fell below its green 30-day one. Its price momentum as measured by the MACD has been negative for the past fifteen trading days. See chart below.

On medium-to-long-term trend analysis, the All-Ords index is still strongly bullish. Its green 30-day trend line is well above its blue 300-day one.

Unlike America, Australia’s stock market for most of last year swung sideways because it has few tech stocks promising new riches through AI (artificial intelligence). However, the All-Ords like the S&P 500 has enjoyed a strong rally since October 2023 but for a sharp pullback in January and now a further one in April 2024.

The All-Ords dark green Coppock (COP) momentum indicator bottomed at the end of December 2022 and thereafter trended up into positive territory where it first wobbled before ascending higher.

In the past whenever the Coppock turned up in negative territory it signalled the end of an Australian bear market. Only end of month readings are meaningful since the Coppock is a monthly based index.

See next chart.

America’s Market

The Australian All-Ords index is highly correlated to the American S&P 500 index as shown by the following chart. About 70% of the All-Ords movements are in synch with the S&P500, meaning only 30% is influenced by local or foreign events not impacting the USA. Hence the importance of tracking what is happening on Wall Street’s stock exchange.

America’s S&P500 share index is bearish on short-to-medium-term trend analysis since its red 10-day trend line is below its green 30-day line. Its MACD momentum indicator has been negative for the past twenty trading days, though less so in the last week.

See next chart.

The S&P 500 index’s medium-to-long-term trend went bullish on 14 April 2023 after the S&P 500 share index’s green 30-day trendline rose above its blue 300-day trendline. It became extremely bullish after its 10.3% correction in August to October 2023. It remains so notwithstanding its pullback since the 28 March.

The dark green S&P 500 Coppock (COP) momentum indicator turned up at the end of March 2023 and thereafter has continued rising and is strongly positive which confirms that the previous US bear market is well and truly over. Only end of month readings count for the Coppock since it is a monthly signal.

See following chart.


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