There’s an old American stock market adage which says that the way Wall Street performs in January tells us how the rest of the year will go.
Well, after the fall in January, the US market could be looking at a miserable 2015, and the way the Australian market went means we are going to have a great 12 months, along with Europe and the UK.
But that’s not how many analysts and ‘experts’ are seeing it. They look to the US to do well this year, Europe to be boosted by the weaker euro but battered by Greece, and Australia to stagger sideways or lower for much of the year.
Last week saw losses for US shares (down 2.8%, with half that fall happening in the late sell-off on Saturday morning, our time), Eurozone shares (down 0.6%), while Chinese shares suffered a 3.9% fall.
But rises were enjoyed by Japanese shares (up 0.9%) while Australian shares had a solid 1.6% gain.
Despite that, the local market will start February with a small loss today, if the 24 point drop on the futures market early Saturday morning is any guide.
Bond yields mostly fell for another week after the European Central Bank’s easing program dominated the week before.
Oil had a bounce on Friday from oversold levels suggesting a base may have been formed around $US45 a barrel.
End of month covering by investors short oil saw futures prices surge 6% to 8% on Friday – raising the question, will it last into a new month, or will we see a renewed sell-off from today as a new trading month starts?
And that talk of an RBA rate cut tomorrow pushed the Aussie dollar below 78 USc for the first time since 2009 to a close of 77.62c on Saturday.
Looking at January as a whole, the US market ended in the red for one of the biggest monthly falls for some time.
In fact the US market has gone rapidly from being a winner for 2014 as a whole to an early loser for 2015, with a drop of 3.1%.
So also has the Chinese market which had a big gain in 2014, but lost nearly 1% last month, with sharp falls last week wiping out gains made earlier in the month.
European shares surged 7.1%, thanks to expectations about that ECB easing and the weaker euro. Japanese shares rose 1.3%, despite more signs its central bank easing program isn’t working as planned.
And Australian shares jumped 3.3% in January, although from much of the reporting and chat you wouldn’t have thought so – at times it seemed more like a stealth rally.
The AMP’s chief economist Dr Shane Oliver wrote at the weekend “China aside, there is clearly a bit of investor rotation at play here along with central bank action, notably the ECB and the Bank of Japan in easing mode and hopefully the RBA too, but the Fed edging towards tightening”.
He says that so far as relating January’s performance on Wall Street (still the globe’s most important market) to the rest of the year the January barometer, “As goes January, so goes the year….has sent a bad signal” to markets for the remainder of this year.
But he questions the reliability of the adage “it is not that reliable when it comes to negative January’s going on to negative years. In fact, since 1980 the hit rate of a negative January going on to a negative year has only been 38% in the US.”
“The most recent failure on this front was last year when US shares fell 3.6% in January but rose 11.4% in 2014 as a whole.” So a negative January doesn’t mean much for the rest of the year as a whole,” Dr Oliver wrote.
But for Australia he points out that “It’s not an issue for Australian shares of course which have had a positive January (up 3.3%), and where since 1980 positive Januarys have seen positive gains for the year as a whole 75% of the time”.
A problem for Australia though, according to other analysts, is that the Australian market is even more dependent on the performance of the big four banks and Telstra, with a small assist from BHP and Rio Tinto.
That’s why the NAB’s first quarter trading update this week and the Commonwealth Bank’s half year profit next week will be vital for investors of all sizes. Good news will buoy the market and probably produce further gains, and weak figures will be a blow to sentiment.
Normally talk of a rate cut, and then the rate cut happening, would be positive for the market, but if one happens tomorrow, or in the next couple of months, it won’t have any impact. The rate cut will be recognition that the domestic economy remains weak, despite nearly 18 months of rates at a record low of 2.5%.
