It has been more than a year since I wrote about the Australian stock market, mainly because I was involved in other things and secondly because the market was in any case well above the long-term average, as I wrote in January 2019. So a market correction should eventually take place, as they always do, but this current correction has a real sting in its tail.
First, let's keep things calm and remember that market corrections are common and we can expect to withdraw once a year on average with somewhat smaller withdrawals than that. Yes, the current correction of the ASX market was cruel, but on the other hand, the S & P / ASX 200 (XJO) has had a very good upward trend over the past year, as we can see in the chart below. The recent sell-off has certainly pushed the pressure back to where it was in early 2018, but that's what happens when a correction hits – i.e. the market deteriorates.
S & P / ASX 200 Index (XJO) Jan 2018 – Mar 2020
S & P / ASX 200 Index (XJO) Jan 2018 – Mar 2020
Now, when market corrections take place, my advice is not to pay much attention to the scary headlines about "billions swept from the market" etc., or reporters excited writing their usual stories of market gloom. and the end of capitalism. I would rather propose to look at the long-term picture and see how the market has performed in the past and also how it has recovered from previous corrections and slumps. To do this, I use a simple map of the S & P / ASX 200 Index from 1992 to the end of the market today – March 9, 2020.
On the above graph I have drawn two trend lines (without any detailed scientific analysis). We can call the bottom red line the gloomy line and it follows the lowest point where the market has fallen since 1992. If the ASX were to drop to just over 4,000 we would be in the area of ??the Global Financial Crisis (GFC) and this could have happened if the corona virus is not present. The top green line is basically the long-term trend for the ASX 200, which suggests that the market may already be oversold and this usually happens during corrections, especially when investors with leveraged portfolios are making margin calls. Between those two lines is an area of ??uncertainty and none of us can be sure whether the ASX 200 will continue to move to that area or not.
But what we can do is look at the other corrections and in general there has been some trading around a bottom in the past, after which the market recovers quite quickly and then goes back up in line with the long term trend. So at this point, I would be looking for the market to potentially move around the 5500 level (or a little lower) for some time and then recover to 6000 quite quickly. But the very big unknown here is the coronavirus and try a predicting how it will or will not spread is pure guesswork for most of us. What seems obvious, however, is that in many economies, tourism and the travel sector need time to recover, while in other sectors, pent-up demand should boost stocks in those areas relatively strongly. In Australia, for example, the government could take measures to stimulate the economy and if this happened it would stimulate a wide variety of stocks.
So for now I wouldn't be surprised if the market continued to fall, but I don't expect it to drop much below 5000. This means that a number of high quality blue chip stocks are now available with price / earnings (P / E) ratios and dividend yields looking quite attractive. I am still very cautious about the short-term outlook, but even during this uncertainty, there are many ASX 200 stocks worth checking out and putting on a watchlist.
Disclaimer: Information and analysis are for general information purposes only and should not be considered investment advice.
