So much has been happening on a daily basis in the financial markets right now that it is worth a quick recap of November’s events:
- Barack Obama was elected President in a convincing victory.
- European Central Bank cut rates by 0.5% to 3.25%.
- UK’s Bank of England cut rates by a surprise 1.5% to 3%.
- The Aussie RBA cut interest rates early in the month by a surprise 0.75% to 5.25%.
- US unemployment hit 6.7%.
- Most major economies (except Australia, so far) including US, Japan, UK, Germany, fell into recession.
- GM and Ford pleaded for a Government rescue. US Government bailed out Citigroup.
- US Government announced another initiative (“TALF”) to prop up consumer loans.
- World Bank said China’s growth to slow to 7.5% for 2009.
- Terrorist attacks in Mumbai.
- China cut rates by 1.08% to 5.58%.
- Aussie PM Kevin Rudd announced $15 billion spending package.
Australian interest rates cut by another 1% ‐ cash rate now at 4.25%
As broadly expected by the markets, having priced in a 1% cut, the Reserve Bank of Australia (RBA) cut official interest rates to 4.25%. This is the same level that helped the Australian economy to get through the deflation risk period of late 2001 and represents the biggest about face on monetary policy in recent history.
The RBA has moved quickly and with several large banks immediately announcing that they will bepassing on all, or most, of the cut, it should be welcome news for Australian households in the lead up to Christmas. Together with the spending measures announced by the Government, and a large fall in the Australian dollar exchange rate, significant policy stimulus should support demand over the year ahead. There is still room for further easing in the first half of 2009, with the official cash rate likely to dip below 4%.
Bursting the latest bubble – the “bubble” of pessimism
Despite equity markets in Australia and the US being up around 10% for the last week of November, people may assume that bull markets are forever dead.
So, how do we burst the bubble of pessimism? Keeping it simple, here are four key points:
- Unlike the 1930s, the stimulus being applied to economies is decisive, massive and creative. This will make a difference.
- Markets have fallen to such an extent to have priced in a major global depression. This is an extreme view and unlikely to happen.
- Throughout history, the Australian share market (as based on the All Ordinaries Index) has always bounced back from big falls to reach new highs. Should this time be any different?
- Investors who panic at these times tend to miss out over the longer‐term by selling assets at low prices and missing the opportunity to buy back in. Staying calm, if you have a diversified, high quality portfolio, will be a good long‐term strategy.
The key of course, is timing. There have been several examples during the year of what looked to be excellent buying opportunities. There were technical examples, fundamental examples, put/call ratios, government stimulus packages and a myriad of other measures. The market glanced at them and continued on its downward path.
So when will the market turn? That’s the $64billion question. Traditionally, equity markets put on a Christmas rally following the seasonally weak months of September and October. Will that follow through this year?