Wednesday, 31 October 2007

XAO extends gains in October

Last month I speculated that the All Ords would finish down for the month of October and surprise, surprise I was wrong. The All Ordinaries (XAO) finished up 3% for the month and has risen 9.6% since the end of July. From one year ago the XAO has risen 26.6%.

As we turn to November we are reminded that the so-called santa rally kicks in taking us through to the end of March in what is typically the best period for stocks. Looking at the last 10 years worth of data on the XAO, the month of November saw gains 9 times out of 10. The only time in the last 10 years the XAO finished lower in the month of November was in 2003 when the XAO fell 2.6%.

So it would seem to be a brave call to bet against a 9 out of 10 record but I'm going to do it anyway. The Australian economy continues to expand at a good pace despite a worsening drought and a lackluster housing market. As usual the direction of the XAO will be heavily influenced by the movements in the US market.

As I am writing this we are about 7 hours away from a Federal reserve decision on interest rates. The consensus is for a 0.25% rate cut.

If indeed the Fed cuts 25 basis points then the market should rally in the short term. However I think the rally will be much more short lived than the rally after the previous 50 basis point rate cut. If the Fed decides to go another 50 basis points then all bets are off for a pullback in November.

In the US, consumer confidence took a bigger than expected fall in October, housing is horrible and getting worse, banks and securities firms are taking big hits, SIV's are in trouble, the ABX indices look sick and corporate earnings have flat-lined.

US employment numbers will be crucial in the next few months as will retail spending, both have slowed but are not yet at recessionary levels. Although it puts me squarely in the minority camp, I see no evidence to suggest the US economy will avoid a recession in 2008. Of course, if that scenario plays out, the risks for equity markets remain firmly to the downside.