The incredible rally on Australia’s sharemarket has rightfully been described as miraculous by experienced market watchers.
There we were at lunchtime yesterday staring at a market down 5.5% to lows not seen since the GFC. Fast forward to 4pm and the market had not only recovered its gains, but kept rising to finish the day up 1%.
The whole incident doesn’t do much to reinforce our belief in the wisdom of the market. Instead, it should highlight how quickly investors latch on to the herd when it moves in either direction.
Exactly what sparked the rally isn’t clear, but a fund manager at a large investment firm I spoke to last night said institutional investors were rubbing their hands together as the crazy panic set in yesterday morning.
His firm invested tens of millions of dollars in shares they scooped up at bargain prices.
“We’re quite bullish at the moment,” he told me. “Long-term, of course.”
And that’s the crucial point. While there is a chance that sharemarkets have reached the bottom of their correction, the extreme volatility we’ve seen (both the US and Australian markets dived sharply before recovering) suggests that we could still be in for a rocky few months before the outlook improves.
As we’ve been saying all week, the fundamentals are still very good, particularly in Australia. And hopefully the rally on the Australian market, which is continuing today (shares climbed 3% in early trade) will help push the drama of the last week out of consumers’ minds.
But there is little doubt fragile consumer confidence will take a hit from this volatility and spending will be lower in the lead up to Christmas. This will be a tricky little time for entrepreneurs to negotiate.
Questions also remain about the ability of overseas governments to do much to counteract any slowdown that results from this market turmoil.
The most obvious reason given for the rallies in Australia and the US was the hope that the US central bank, the Federal Reserve, would unveil some sort of stimulus measures to give the economy a little adrenalin shot.
In the end, all the Fed said was that it will leave rates low until at least the middle of 2013 – something it may well have had to do anyway.
Markets might have rallied on that news overnight and this morning but investors may soon realise that there are no “new” measures coming to give growth in the US a push a long.
That suggests we’re still in the long, slow global recovery that we’ve been talking about for months. The rally doesn’t change that.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
