Wednesday, 30 April 2008

XAO breaks five month losing streak

The XAO broke its five month losing streak in April notching up a 4.6% gain from the previous month and breaking my winning streak of calls on the direction of the Aussie market. So what about the old adage, 'go away in May?' As can be seen below, that is largely a myth when applied to the Aussie market. Since 1985 the month of May has only declined 8 times as opposed to rising 15 times.

Of course much will depend on the data coming out of the US. The markets seem to have decided to look beyond the valley of declining earnings a worsening housing crisis and deteriorating economy. The consensus seems to be that any recession in the US will be short and shallow. Rebate checks being mailed out this month are expected to give a boost to GDP and spur a second half recovery.

That view I think is overly optimistic, I think the US recession will be longer and deeper than most expect and that is certainly not priced into the markets. We could well see a bounce in US economic growth in the third quarter this year but that may just be setting up for a replay of the 1980's. The US dipped into a short, shallow recession in 1980 only to plunge into a deep 16 month long recession in 81-82.

The consensus is that the bottom is in for equities. If that is the case it will indeed be disappointing as that means equity market returns over the coming years will be average at best. I keep hearing the nonsense about the market looking cheap based on forward earnings. Earnings that have very poor visibility.

As always, I don't rule out the possibility that the stockmarket can delude itself higher despite deteriorating company and economic fundamentals. Afterall, earnings took four years to recover to previous highs in the early 1990's yet stocks continued to go higher for most of that period.

However, given the deteriorating fundamentals on a number of fronts - the economy, company earnings, housing, inflation and a stretched consumer, I think the market is has to take a few steps back before it can start to march forward again. Thus I think May will see a decline in the XAO.