Stock Market

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<p class="post-title entry-title">EXPERT OBSERVER </p>
<div>The Crestmont P/E is still levitating 119 per cent above its arithmetic mean, and remains close to the highest level in history at 33. </div>
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<div>During the tech bubble/bust the Crestmont P/E rose above 25 (denoting 'irrational exuberance') and momentarily touched the current record high of 33.7 before promptly crashing.</div>
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<div>In 1929 ahead of the Wall Street Crash and the Great Depression the Crestmont P/E peaked at 26.4.</div>
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<div>And before the subprime financial crisis it peaked at 24.7.</div>
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<div><em>Here's the chart update until today:</em></div>
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<div><span style="text-decoration: underline;"><em>Source: Advisor Perspectives</em></span></div>
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<div>Earnings reports will be interesting to follow this year given that there's been a severe disruption to global economic activity in 2020. </div>
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<div>Back in Australia earnings expectations have been revised dramatically lower, for five sectors in particular:<br><br>
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<span style="text-decoration: underline;"><em><br></em></span><span style="text-decoration: underline;"><em>Source: Morgan Stanley</em></span>
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<div>Markets are forward-looking of course, but this puts PE valuations for the ASX 200 at extremely lofty levels. </div>
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<div><span style="text-decoration: underline;"><em>Source: Morgan Stanley</em></span></div>
<p id="post-body-7807194319875705440" class="post-body entry-content">This would not be a good time to disappoint markets with an earnings miss, you'd think.</p>
<p class="post-body entry-content"><strong>Pete Wargent</strong><span> is the co-founder of AllenWargent property buyers and a best-selling author and blogger</span><strong> </strong></p>
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Where are markets heading with nosebleed valuations: Pete Wargent

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<p><span>Golly. My word there's some crappy economic data doing the rounds globally at the moment - the commodity markets smash-up continuing to take front and centre stage, while China's manufacturing activity gauge slumping to a 77 month low for good measure.</span></p>
<p><span>The commodity price exuberance was in part an echo of China's own property market largesse. Or if bubbles are your thing - and they seem to be all the rage these days - an echo-bubble of China's property bubble.</span></p>
<p><span>With stock markets in the business of tanking anywhere and everywhere from the US to the UK, Australia, China, Japan and...well, pretty much all over the show to be honest...perhaps it's no surprise that real estate is sifting back in favour togiven record low borrowing rates around the developed world.</span><span style="line-height: 1.3em;"> </span></p>
<p><span>Aussie stocks are well on track for their worst month since the global financial crisis having wiped close to 9 per cent off their value already in the month of August alone, while UK stocks have already meandered into correction territory.</span></p>
<p><span>On the flip side for British investment markets, the UK Council of Mortgage Lenders reported that UK mortgage lending has bolted to its highest level in seven years - since before the financial crisis fallout - at an estimated £22 billion for the month (where is the pound symbol on keyboards these days, by the way?).</span></p>
<p><a href="/images/2015/08/24/CML.jpg" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2015/08/24/CML.jpg" alt=""></span></p>
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<div>This is particularly noteworthy for Australian investors since the United Kingdom introduced macro-prudential measures of its own to its housing market back in 2014 in the form of the Mortgage Market Review (MMR).</div>
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<div>Now that the impacts of the MMR are already receding into the rear view mirror - and with interest rates still stuck at rock bottom at the effective "zero lower bound" - mortgage lending appears to be ripping higher again.<br><br>The key point here being that while macro-prudential markets may be designed to effectively slow the market, they don't take away the demand for property completely or permanently.</div>
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<em>Hometrack</em> noted that Cambridge, Oxford and the English capital city of London are continuing to lead the way in terms of capital growth over the past year, which will come to no surprise to readers of my book <em>Get a Financial Grip</em> from some years ago, of course. </div>
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<div><a href="/images/2015/08/24/UK.jpg" target="_blank">Click to enlarge</a></div>
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<span>What's more, the boom could be only just be </span><a href="https://www.telegraph.co.uk/finance/property/house-prices/11815503/House-prices-soar-in-major-UK-cities-and-this-is-just-the-beginning" target="_blank">in its infancy</a><span>.</span><br><br><strong><span style="text-decoration: underline;">Australia - 3 positives for property in 2016?</span></strong><br><br><div>Despite the implementation of macro-prudential measures in Australia whereby APRA will aim to cap investor lending credit growth at around 10 per cent per annum, there are three other forces which may conspire to see 2016 being a strong year for property.</div>
<br><div>Firstly, Assistant Treasurer Josh Frydenberg has <a href="https://www.afr.com/business/banking-and-finance/financial-services/josh-frydenberg-flags-no-ban-on-smsf-property-borrowing-20150820-gj4amh" target="_blank">reportedly</a> flagged that there will no banning of SMSF property borrowing, which could come as something of an upside surprise for capital city property markets, although those without substantial deposits may find real estate investment via their SMSF a tough proposition.  </div>
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<div>Secondly, does anyone else think that interest rates are on the "<a href="https://petewargent.blogspot.com.au/2015/05/the-long-slow-march-to-zero" target="_blank">long, slow march to zero</a>"? I can't predict the future, of course, but put it this way - I wouldn't be betting against it! </div>
<div>
<br>The cash rate futures implied yield curve suggests that markets area already looking for another interest rate cut to 1.75 per cent by the second half of 2016.</div>
<div> </div>
<div>It's hard to know where to start with commodity prices crash. The iron ore and coal correction, of course, has been one for the ages. Crude futures have hit upon a deadly slick.<br><br>"Dr. Copper" is testing 6 year lows and toying with financial crisis depths while lurking below US$2.30/lb. Precious metals are miles below their peaks...and on the list goes.<br><br>Ordinarily one might say that this will be bad news for property markets and investor sentiment, yet realistically with mortgage rates falling towards record lows and cash in the bank paying essentially nothing worthwhile after inflation, where else are Aussies going to invest their money?<br><br>Into our tanking and resources-heavy stock market? Hmm, not so sure about that.</div>
<br><div>Thirdly, with APRA targeting investor loans banks and lenders are likely to go all in on targeting owner-occupier lending.<br><br>HSBC are already now <a href="https://www.afr.com/business/banking-and-finance/owneroccupiers-targeted-with-interest-rate-deals-20150820-gj42mv" target="_blank">offering</a> variable rate mortgages from 3.99 per cent, with is just unbelievably cheap. We might expect to see other banks to follow suit. </div>
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<em><a href="https://www.corelogic.com.au/" target="_blank">CoreLogic-RP Data</a></em>'s index shows that Sydney home values are up by 1 per cent in first three weeks of August alone and a stonking 18.2 per cent over the past year. It's turning into a monster property boom, with Sydney dwelling values now up by more than 50 per cent since 2012.</div>
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<div><span>With Sydney inching closer to its market peak, investors are increasingly shaping up to scope out Brisbane for better value, with investor lending on a 12mMA basis now tracking at its highest level since April 2008.</span></div>
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<div><span>Sure, APRA's investor lending crackdown will jam a stick in the spokes for a while, but meanwhile Queensland owner-occupier lending has also ghosted past five year highs on a 12mMA basis, after a subdued half decade. </span></div>
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<div><a href="/images/2015/08/24/QLD2.jpg" target="_blank"><span>Click to enlarge</span></a></div>
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<span>And remember the Queensland figures are being dragged down by any number of mining towns and regions which are experiencing negative demand i.e. recessionary conditions.</span><br><br><span>Brisbane could be the one to watch in 2016.</span>
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<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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Three positives for property in 2016: Pete Wargent

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<p>EXPERT OBSERVER</p>
<p>Capital city property prices fell -1.8 per cent in Q2 as the economy was locked down, but remained 6.2 per cent higher than a year earlier.</p>
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<div>The decline was driven, according to the ABS, thus:</div>
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<div><em><span><strong>"The falls in residential property prices were led by the Sydney (-2.2 per cent) and Melbourne (-2.3 per cent) property markets. </strong></span></em></div>
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<div><em><span><strong>House prices fell 2.6 per cent in Sydney and 2.8 per cent in Melbourne, while attached dwelling prices fell 1.4 per cent in Sydney and 1.0 per cent in Melbourne."</strong></span></em></div>
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<div>The mean dwelling prices by state and territory followed the same pattern. </div>
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<div>Transaction levels were very low, but as far as could be estimated the value of the dwelling stock of 10.52 million dwellings declined in value by about $100 billion to $7.14 trillion.</div>
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<div>More timely data from CoreLogic suggests that prices have essentially now stopped declining, except in Melbourne where falls have continued due to the ongoing lockdown.</div>
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<p><strong>PETE WARGENT</strong><em><span> </span>is the co-founder of AllenWargent property buyers and a best-selling author and blogger </em></p>
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Property prices dip 1.8% in Q2: Pete Wargent

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<p>EXPERT OBSERVER</p>
<p>Interesting move from the birthday boy Warren Buffett, swinging hard into Japanese stocks.</p>
<p>Japan's stock market was arguably the biggest bubble in history, accounting for nearly half the global market cap at one stage.</p>
<p>Even the US only hit half of Japan's lofty peaks as measured by CAPE during the tech exuberance.</p>
<p>Japan took 30 years to reach fair value, after land values fell the country sank into deflation with its ageing and declining population.</p>
<p>The US market now looks very expensive again, while the UK looks relatively cheap by comparison.</p>
<p>Australia lies in the middle, with quite a bit (as ever) resting on your views on the outlook for banks.</p>
<p><img src="https://1.bp.blogspot.com/-U4PeFvbZUCo/X0w_k08hi5I/AAAAAAAA33k/WHn2YfsV7q8PmF4F532STWkVhNDyFp9SwCNcBGAsYHQ/s640/Japan%2BCAPE.jpg" width="640" data-original-height="815" data-original-width="1382"></p>
<p>Buffett has bought shares in Japan's five largest trading companies, including Mitsubishi and Sumitomo, perhaps in part a foreign currency play.</p>
<p>This equates to an investment of about $6.25 billion per CNBC, and Buffett may increase holdings up to 9.9 per cent stakes, to be held for the long term.</p>
<p><strong>PETE WARGENT</strong><em><span> </span>is the co-founder of AllenWargent property buyers and a best-selling author and blogger </em></p>
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Warren Buffet swings billions into Japanese stocks: Pete Wargent

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<p>Every time there is a sharemarket rout, the property market gathers momentum as nervous investors seek alternate investments.</p>
<p>So the wobbly Sydney property market might benefit from share investors who don't like the dynamic downturn emerging on local share markets coming out of the United States.</p>
<p>Our shares went down around 3 percent in day last week. It has taken about eight months for Sydney prices to do that, according to CoreLogic, with the median Sydney dwelling down around 3 percent to $884,000.</p>
<p><span>Last July marked the fifth anniversary of the housing market growth phase, which yes has petered out, but is still up slightly on the latest February annualised data.</span></p>
<p>At the end of the day property investors still have their bricks and mortar to drive past and admire. </p>
<p>The Reserve Bank of Australia held rates again at its meeting last week, though lenders continue to make their own moves, both up and down.</p>
<p>The central bank's last move saw it go to 1.5 percent at the August 2016 meeting, so rates have been held steady over three years and for 17 meetings.</p>
<p>It is the longest run of steady rates ever. There were 16 meetings (inclusive) between their August 2013 meeting and December 2014 where they held at 2.5 percent. There was another run of 16 meetings between July 2002 and October 2003 where rates were held at 4.75 percent.</p>
<p>Almost all economists predicted a hold at the first meeting of the year and most don't foresee any change throughout much of 2018.</p>
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Sharemarket turmoil will send investors to property

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<p>The current pullback in shares has been triggered by worries around US inflation, the Fed and rising bond yields but made worse by an unwinding of bets that volatility would continue to fall.</p>
<p>We may have seen the worst, but it’s too early to say for sure. However, our view remains that it’s just another correction.</p>
<p>Key things for investors to bear in mind are that: corrections in the order of 5-15% are normal; in the absence of recession, a deep bear market is unlikely; selling shares after a fall just locks in a loss; share pullbacks provide opportunities for investors to pick them up more cheaply; while shares may have fallen, dividends haven’t; and finally, to avoid getting thrown of a long-term investment strategy it’s best to turn down the noise during times like the present.</p>
<p><strong>Introduction</strong></p>
<p>The pullback in shares seen over the last week or two has seen much coverage and generated much concern. This is understandable given the rapid falls in share markets seen on some days. From their highs to their recent lows, US and Japanese shares have fallen 10%, Eurozone shares have fallen 8%, Chinese shares have fallen 9% and Australian shares have lost 6%. This note looks at the issues for investors and puts the falls into context.</p>
<p>Drivers behind the plunge</p>
<p>There are basically three drivers behind the plunge in share prices. First, the trigger was worries that US inflation would rise faster than expected resulting in more aggressive rate hikes by the US Federal Reserve and higher bond yields. Flowing from this are worries that the Fed might get it wrong and tighten too much causing an economic downturn and that higher bond 6000 yields will reduce the relative attractiveness of shares and investments that have benefitted from the long period of low interest rates.</p>
<p>Second, after not having had a decent correction since before Donald Trump was elected president and with high and rising 3000 levels of investor confidence, the US share market was long overdue a correction, which had left the market vulnerable. Finally, and related to this, the speed of the pull back is being exaggerated by the unwinding of a large build up of so-called short volatility bets (ie bets that volatility would continue to fall) via exchange traded investment products that made such bets possible.</p>
<p>The unwinding of such positions after volatility rose further pushed up volatility indexes like the so-called VIX index and that accelerated the fall in US share prices. Quite why some investors thought volatility would continue to fall when it was already at record lows beats me, but this looks to be another case of financial engineering gone wrong!</p>
<p>With shares having had a roughly 5-10% decline (in fact US share futures had had a 12% fall) from their recent highs to their lows and oversold technically and with the VIX volatility index having spiked to levels usually associated with market bottoms, we may have seen the worst but as always with market pull backs it’s impossible to know for sure particularly with bond yields likely to move still higher over time and if there is further unwinding of short volatility positions to go.</p>
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<p><strong>Considerations for investors </strong></p>
<p><span>Sharp market falls with talk of billions of dollars being wiped off shares are stressful for investors as no one likes to see the value of their investments decline. However, several things are worth bearing in mind: </span></p>
<p><span>First, periodic corrections in share markets of the order of 5- 15% are healthy and normal. For example, during the tech com boom from 1995 to early 2000, the US share market had seven pull backs greater than 5% ranging from 6% up to 19% with an average decline of 10%. During the same period, the Australian share market had eight pullbacks ranging from 5% to 16% with an average of 8%.</span>All against a backdrop of strong returns every year. During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year.</p>
<p>More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (remember the taper tantrum?), an 8% fall in 2014 and a 20% fall between April 2015 and February 2016 all in the context of a gradual rising trend. And it has been similar for global shares, but against a strongly rising trend. See the next chart. In fact, share market corrections are healthy because they help limit a build up in complacency and excessive risk taking. </p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/2/9/Chart1.jpg" target="_blank">to enlarge.</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/Chart1.jpg" alt=""></p>
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<p>Related to this, shares literally climb a wall of worry over many years with numerous events dragging them down periodically, but with the long-term trend ultimately rising and providing higher returns than other more stable assets. In fact, bouts of volatility are the price we pay for the higher longer-term returns from shares. </p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/2/9/chart2.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/chart2.jpg" alt=""></p>
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<p>Second, the main driver of whether we see a correction (a fall 5% to 15%) or even a mild bear market (with say a 20% decline that turns around relatively quickly like we saw in 2015-2016) as opposed to a major bear market (like that seen in the global financial crisis (GFC)) is whether we see a recession or not. Our assessment remains that recession is not imminent:</p>
<p>- The post-GFC hangover has only just faded with high levels of business and consumer confidence globally only just starting to help drive stronger consumer spending and business investment.</p>
<p>- While US monetary conditions are tightening they are still easy, and they are still very easy globally and in Australia (with monetary tightening still a fair way off in Europe, Japan and Australia). We are a long way from the sort of monetary tightening that leads into recession.</p>
<p>- Tax cuts and their associated fiscal stimulus will boost US growth in part offsetting Fed rate hikes.</p>
<p>We have not seen the excesses – in terms of debt growth, overinvestment, capacity constraints and inflation – that normally precede recessions in the US, globally or Australia.<br>Reflecting this, global earnings growth is likely to remain strong providing strong underlying support for shares.</p>
<p>Third, selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss. With all the talk of billions being wiped off the share market, it may be tempting to sell. But this just turns a paper loss into a real loss with no hope of recovering. The best way to guard against making a decision to sell on the basis of emotion after a sharp fall in markets is to adopt a well thought out, long-term investment strategy and stick to it.</p>
<p>Fourth, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So the key is to look for opportunities that the pullback provides – shares are cheaper. It’s impossible to time the bottom but one way to do it is to average in over time.</p>
<p>Fifth, while shares may have fallen in value the dividends from the market haven’t. So the income flow you are receiving from a well-diversified portfolio of shares continues to remain attractive, particularly against bank deposits. </p>
<p>Click here <a href="https://www.propertyobserver.com.au/images/2018/2/9/chart3.jpg" target="_blank">to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/chart3.jpg" alt=""></p>
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<p><span>Sixth, shares and other related assets often bottom at the point of maximum bearishness, ie just when you and everyone else feel most negative towards them. So the trick is to buck the crowd. As Warren Buffett once said: “I will tell you how to become rich...Be fearful when others are greedy. Be greedy when others are fearful.” </span></p>
<p><span>Finally, turn down the noise. At times like the present, the flow of negative news reaches fever pitch – and this is being accentuated by the growth of social media. Talk of billions wiped off share markets, record point declines for the Dow Jones index and talk of “crashes” help sell copy and generate clicks and views. But such headlines are often just a distortion. We are never told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market. And as share indices rise in level over time of course given size percentage pullbacks will result in bigger declines in terms of index points. And 4% or so market falls are hardly a “crash”. Moreover, they provide no perspective and only add to the sense of panic. All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up. So best to turn down the noise and watch Brady Bunch, 90210 or Gilmore Girls re-runs! </span></p>
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The pullback in shares – seven reasons not to be too concerned: Oliver's Insights

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<p>The biggest news of the week was the <a href="https://theconversation.com/three-reasons-not-to-worry-about-the-stock-market-crash-91338" target="_blank">gyrations in the US stockmarket</a>. And the proximate cause seemed to be what one might think of as good news – average hourly earnings for workers in the United States <a href="https://www.bls.gov/news.release/empsit.nr0.htm" target="_blank">rose 2.9%</a> for the year to January.</p>
<p>This led to fears of a spike in inflation – as it could lead to more aggressive interest rate rises by the US Federal Reserve – and a big sell-off on Wall Street.</p>
<p>Regular readers of this column will know that something that has preoccupied the central bankers of the world’s advanced economies has been persistently <a href="https://theconversation.com/vital-signs-economics-cant-explain-why-unemployment-and-inflation-are-both-low-85824" target="_blank">low inflation and wage rises</a>. This has been bad news for workers and has kept interest rates from rising.</p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/2/9/data.jpg" alt=""></p>
<p>The 2.9% rise in US average hourly earnings is the strongest since the financial crisis. This, coupled with the <a href="https://www.bls.gov/news.release/empsit.nr0.htm" target="_blank">low 4.1% unemployment rate</a> in the US, has triggered inflationary fears. Of course, inflation was <a href="https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths" target="_blank">below the Fed’s target of 2%</a>.</p>
<p>This all reveals a fundamental economic truth: it is expectations of the future, not the facts of the past, that drive economic behaviour. That is one reason that the Fed (and the Reserve Bank of Australia) talk a lot about “inflation expectations” – or what people think inflation is going to be – not what it has been.</p>
<p>In domestic news, it was no surprise that the RBA <a href="https://www.rba.gov.au/statistics/cash-rate/" target="_blank">left the cash rate unchanged at 1.50%</a> when the board met this Tuesday. <a href="https://www.rba.gov.au/media-releases/2018/mr-18-01" target="_blank">In his official statement</a>, RBA governor Philip Lowe emphasised Australia’s low inflation and unemployment rates, saying:</p>
<p>The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.</p>
<p>There was some further positive news on the employment front from <a href="http://www.media.anz.com/phoenix.zhtml?c=248677&amp;p=irol-jobad&amp;nyo=0" target="_blank">ANZ’s job advertisements report</a>. It showed that ads were up 6.2% in January, and 13.8% on an annualised basis.</p>
<p>The big question, however, is about wages growth, which has proved very sluggish. We will have to wait until later in the month for new evidence on that in the form of fourth-quarter 2017 wages figures.</p>
<p>Cost of living figures <a href="https://www.propertyobserver.com.au/https://www.abs.gov.au/ausstats/abs@.nsf/mf/6467.0" target="_blank">released Wednesday by the ABS</a> showed what most people will tell you – that the cost of living has increased. The index is up by between 0.6% and 1.0% in the December quarter, depending on the type of household.</p>
<p>It is worth pausing briefly to discuss the difference between the Living Cost Index (LCI) and the Consumer Price Index (CPI). The ABS describes the purpose of the LCI as to answer the following question:</p>
<p>By how much would after-tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?</p>
<p>This is slightly different from the CPI, which measures price changes in a basket of goods and services. Perhaps the key difference is that the LCI includes mortgage interest and treats housing costs differently. For a more detailed description of the differences <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Products/6467.0%7EDec+2017%7EExplanatory+Notes%7EExplanatory+Notes?OpenDocument#2718121728189953" target="_blank">see this description</a>.</p>
<p>And for no group of households did the LCI come in lower than the CPI (0.6% for the December quarter) and for most it came in higher. For example, on an annualised basis the LCI rose by 2.0% for “employee” households and by 2.3% for “pensioner and beneficiary” households. By contrast, the CPI grew 1.9% in the year to December.</p>
<p>Moving from the micro to the macro, <a href="https://www.propertyobserver.com.au/https://www.abs.gov.au/ausstats/abs@.nsf/mf/5368.0" target="_blank">ABS data</a> showed a trade deficit of A$1.358 billion in December, after a small surplus in November. This was largely driven by a strong increase in imports of fuel and machinery.</p>
<p>In the US, consumer credit for December <a href="https://tradingeconomics.com/united-states/consumer-credit" target="_blank">increased by US$18.45 billion</a>, below expectations of a US$20 billion increase. On the other hand, November figures were revised higher from US$27.95 billion to US$31.02 billion, making the overall picture pretty much a wash.</p>
<p>All of the data in Australia and abroad point to a tricky balancing act for policymakers. Interest rates almost surely have to rise in the medium term, but acting too quickly can squash a recovery; acting too slowly risks overheating the economy.</p>
<p><img src="https://counter.theconversation.com/content/91224/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">And, as the US stockmarket fluctuations in the light of wages figures show, to get the balance right policymakers need to have an accurate forecast of people’s expectations about inflation and other variables. And that is challenging.</p>
<p><span><a href="https://theconversation.com/profiles/richard-holden-118107" target="_blank">Richard Holden</a>, Professor of Economics and PLuS Alliance Fellow, <em><a href="http://theconversation.com/institutions/unsw-1414" target="_blank">UNSW</a></em></span></p>
<p>This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/vital-signs-future-expectations-causing-sharemarket-gyrations-and-interest-rate-doubts-91224" target="_blank">original article</a>.</p>
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Future expectations causing sharemarket gyrations and interest rate doubts

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<p><span>The month of October often creates apprehension amongst investors given its historic track record with the 1929 and 1987 share market crashes. And it was in October 2007 that US shares peaked ahead of 50% plus falls (in most share markets) through the Global Financial Crisis (GFC). </span></p>
<p><span>From the post-GFC share market lows in March 2009, US shares are up 278% and global shares are up 196% to new record highs and Australian shares are up 92%. After such strong gains it’s natural to wonder whether another major bear market is imminent. </span></p>
<p><span>Aside from left field events triggering a crash, the key question remains where are we in the investment cycle? </span></p>
<p><span>This note updates our analysis on this front from earlier this year </span><span>and also provides a comparison to 1987. </span></p>
<p><strong>Second-longest US cyclical bull market since WW2</strong></p>
<p><span>The cyclical bull market in US shares is eight and a half years old. It’s the second longest since World War Two and the second strongest in terms of gain. See the next table. </span></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/19/Shane1.jpg" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/19/Shane1.jpg" alt=""></span></p>
<p>At the same time, according to the US National Bureau of Economic Research the current US economic expansion is now 100 months old and compares to an average expansion of 70 months.</p>
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<p>The concern is that with the US bull market and economic expansion both old, US shares are vulnerable to another bear market and, by implication, global and Australian shares are, too. </p>
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<p><span><strong>Still in the sweet spot in the investment cycle</strong> </span></p>
<p><span>First some context. The next chart is a stylised version of the investment cycle – the thick grey line is the economic cycle.</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/19/Shane2.jpg" target="_blank">Click to enlarge</a> <span style="font-size: 12.16px;"> </span></p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/19/Shane2.jpg" alt=""></span></p>
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<p><span>A typical cyclical bull market in shares has three phases: scepticism – when economic conditions are weak and confidence is poor, but smart investors see value in shares helped by ultra easy monetary conditions; optimism or the “sweet spot” – when profits and growth strengthen and investor scepticism gives way to optimism while monetary policy is still easy; euphoria – when investors become euphoric on strong economic and profit conditions, which pushes shares into clear overvalued territory and excesses appear forcing central banks to become tight, which combines with overvaluation and investors being fully invested to drive a new bear market. </span></p>
<p><span>Typically, the bull phase lasts five years. However, “bull markets do not die of old age but of exhaustion” – their length depends on how quickly recovery precedes, excess builds up, inflation rises and extremes of overvaluation and investor euphoria appear. </span></p>
<p><span>Our assessment is that we are still in the “sweet spot” phase, albeit more advanced now. Global economic indicators are strong, growth forecasts are being revised up as highlighted by the IMF and this is driving stronger profits. But thanks partly to the slow post GFC recovery, there are still few signs of the sort of excesses that characterise the “euphoria” phase that ultimately leads to the “exhaustion” of the cyclical bull market and the next bear market. </span></p>
<p><span>- There is no overinvestment globally. While the US recovery is further advanced than most, even here business investment and housing investment (excesses in which preceded the tech wreck and GFC, respectively) are around or below long-term averages relative to GDP. </span></p>
<p>- Overall private sector debt growth is modest in most countries.</p>
<p><span style="font-size: 12.16px;">- After years of below trend growth globally, spare capacity still remains &amp; this (along with technological innovation) has been constraining inflation. Wages growth remains weak and has only just started picking up in the US. Core inflation in major countries ranges between 0.2% in Japan to 1.3% in the US. </span></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/19/Shane3.jpg" target="_blank"><span style="font-size: 12.16px;">Click to enlarge</span></a></p>
<p><span style="font-size: 12.16px;"><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/19/Shane3.jpg" alt=""></span></p>
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<p><span>- As a result, global monetary conditions remain easy and without a surge in inflation look likely to remain so. The Fed is continuing to tighten but it’s “gradual” and from a very easy base and other central banks (including the RBA) are on hold. A shift to tight money that brings about a global economic downturn looks a fair way off.<br></span></p>
<p><span>- Share market valuations are mostly okay. Measured against their own history, shares are no longer cheap. This is particularly so for US shares. But once allowance is made for low inflation and still-low bond yields, shares are fair value to cheap depending on the market (next chart). </span></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/19/Shane4.jpg" target="_blank"><span>Click to enlarge</span></a></p>
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<p><span>Finally, while short term investor sentiment bullish, long- term measures of positioning are not. In the US, the huge investor flows into bond funds over the last few years have yet to reverse in favour of shares. In Australia, sentiment towards shares remains low. Still no euphoria here. </span></p>
<p><span>It may also be argued that major non-US share markets and Australian shares did have a bear market in both 2011 and 2015-16 so their cyclical bull markets are not old at all. </span></p>
<p><span>Overall, we are still not seeing the signs of excess, euphoria and exhaustion that typically come at cyclical economic and share market peaks ahead of recessions and deep bear markets. So barring some sort of external shock, the cyclical bull market in shares looks like it still has further to go. </span></p>
<p><span><strong>What to watch?</strong> </span></p>
<p><span>The key to watch for the next big bear market is for signs of excess – eg, overinvestment in key areas, rapidly-rising inflation, aggressive tightening in monetary policy, clear overvaluation and investor euphoria. This would then set the scene for the next economic downswing and hence a more severe bear market (as opposed to a correction or short-term bear market like we saw in 2015-16). At the moment, it’s hard to see much excess but we do expect US inflation to start rising </span>from here.</p>
<p>One risk is that the longer things remain benign, the more investors will expect them to remain benign and this will result in excessive risk taking setting up the scene for a sharp fall in markets. But it’s only lately investors have started to get comfortable. So this may have further to go.</p>
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<p><span><strong>What about comparisons to 1987?</strong> </span></p>
<p><span>October 19 marks the 30th anniversary of the 1987 share market crash and as always comparisons are being wheeled out. While the bulk of the crash was concentrated in October 1987 (US shares fell 20% on October 19 and Australian shares fell 25% on October 20), US shares fell 34% over three months and Australian shares lost 50% over two months. The causes remain subject to debate – but the key appears to have been a 3% rise in US inflation, a 2% rise in US bond yields and Fed tightening hitting markets after a period of very strong gains. The following tables provide a brief comparison to today. </span></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/19/Shane5.jpg" target="_blank"><span>Click to enlarge</span><span style="font-size: 12.16px;"> </span></a></p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/19/Shane5.jpg" alt=""></span></p>
<p>Compared to 1987, the gains over the past 12 months have been more modest and while forward price to earnings ratios are higher (in the US) or the same, this should be the case given far lower inflation and bond yields and real dividend yields are far more attractive.</p>
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<p><span>It’s also noteworthy that share markets had already started to break down before the October 19 1987 crash whereas that has not happened now. As an aside, it’s worth noting that despite the 1987 crash, economic growth was barely impacted and so shares moved higher in 1988 and 1989. </span></p>
<p><span><strong>Investment implications</strong> </span></p>
<p><span>First, corrections should be anticipated – with Trump, North Korea and the Fed being potential triggers – and the fickleness of investor confidence means we can’t rule out another crash like in 1987. But despite this we still appear to be a long way from the peak in the investment cycle. </span></p>
<p><span>Second, non-US share markets and economies are less advanced in their cycles and provide opportunities for investors. </span></p>
<p><span>Finally, it’s worth noting that several bad years (1987 and 1929) have given Octobers a bad wrap globally. While historically they have been a soft month in Australia (with shares down an average 0.3% since 1985 in October), they have actually been positive in the US (up 1% on average). </span></p>
<p><span>Dr Shane Oliver<br> Head of Investment Strategy and Chief Economist AMP Capital </span></p>
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Where are we in the global investment cycle and what's the risk of a 1987 style crash? Shane Oliver

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<p>Queensland's biggest builder, Impact Homes, has taken a 4.9 percent stake in its rival, the Simonds Group.</p>
<p>McDonald Jones, the biggest builder in NSW, also holds just over 5 per cent of the ASX-listed stock. </p>
<p>Last month Gary Simonds reached an agreement with Melbourne's wealthy Roche family to take the home builder private with shareholders to vote on the plan in early November.</p>
<p>The Simonds family who own 39 percent of the stock are unable to vote on the scheme.</p>
<p>Simonds posted a $14.9 million annual loss for fiscal 2016.</p>
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