XAO Posts Worst Yearly Performance Ever

Firstly a look at December, last month I thought we might get a rally into the new year, certainly we had a rally in the last few days of December but it wasn't enough to turn the XAO positive for the month, the ALL ORDS finishing down -0.4%.

However the real story was that the XAO finished down -43.0% for the year, that's the worst performance for the index, ever. There were only 3 months in 2008 that finished up for the XAO and three times the XAO fell more than ten percent in a single month.


2008 also saw a cascade of events that noone would have thought possible at the beginning of the year. The US investment bank industry disappeared, home prices and sales fell by record margins. The effective nationalization of a large part of the US financial system, zero interest rates from the Fed, and the list goes on.

In Australia the RBA did an about face on interest rates slashing the overnight rate by 3% as the reality hit home that we cannot decouple from the United States because we dig up rocks and export them to China. The silly fears of inflation have now turned to fears of deflation as I expected they would.

Still, there is a lot of denial about in Australia and on some level that is understandable, unemployment is still low and house prices while falling in some parts of the country have fared much better that other developed countries. Is Australia different or are we just lagging the US and the rest of the world? I'd say it's a bit of both.

So what will January bring? As noted a few times, we are yet to have a sustained bear maket rally. A pattern has played out in the last few months where the index sustains big losses in the beginning of the month and rallies toward the end. Certainly December saw a decline in volatility and an easing of fears.

Although January will bring another horrible payroll report in the US, the worst GDP reading for 25 years and the worst corporate earnings number for the S&P500 so far in this down cycle, the excitement around Obama's inauguration could give the market's a boost. Whilst I don't have much faith in the economic policies outlined by the incoming administration, the inauguration can do enough to spur sentiment in the short term.

So I'll call the XAO higher in January with the usual caveat that my predictive powers are no better than anyone elses when it comes to short term market movements. Looking further out I still believe we will hit new lows in the stock market some time in 2009. But I will post more on the likely themes for 2009 in the next couple of days. For now, don't forget to vote in this months poll.