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Over the past two years or more, there have been many claims that the US stock market is overheated and that we need to prepare for the bubble to burst as the S&P 500 will crash. Yet the US market is still rising, so should we prepare for a crash or keep buying?
I recently read an article discussing the impact of presidential cycles on the US stock market. Given that the US presidential election will occur in November of this year, I decided to investigate how the US election cycle affects the Australian market and its impact on the medium to long-term direction of the All-ordinaries index.
The presidential cycle is broken up into 4-year terms. In analysing the last 10 presidential cycles beginning in 1984, it’s interesting to note that in the lead-up to the elections, if the Republicans are in power, the Australian market tends to experience a dip. But if the Democrats are in power, as they are right now, there is, on average, a 7.2 per cent positive return in the last year of the president’s term. The Australian market is currently up 6.83 per cent and looking bullish, so this trend seems to be well and truly alive.
So, what occurs after the election? Regardless of which party wins, our market tends to perform well in the first year. Looking at the past 10 cycles, the trend in the first year has been mostly positive, with eight years up and only two either flat or down. The rise itself, however, varies based on which party is in power. If the Republican Party wins, the average increase is 13.4 per cent, but if the Democrats win, the market rises an average return of 22.68 per cent.
However, things begin to change in the second year of the election cycle. Year 2 is the worst year of each cycle given that seven out of ten times, the market ends negative or flat. So, what does this mean for the Australian market moving forward?
Given that the Democrats are in power now, we should see a positive return for the All Ordinaries Index this year of around 7 per cent into November 2024. To add to this good news, regardless of who wins the election in November, the Australian market should continue to rise in 2025 with expectations that it will begin to fall away from November 2025.
What about the US market? Well, things are not much different regarding the S&P500, but remember, before Trump got elected, there were lots of predictions that the stock market would crash, yet it didn’t until COVID arrived, which was at the end of his presidency. Right now, it’s safe to say that I don’t believe the US or Australian market will crash this year.
While this kind of analysis provides some wonderful insights into the history of our market and potential foresight, I encourage you to always analyse a chart so that you are up to date with what is happening as it unfolds, given history does not always repeat itself.
What are the best and worst-performing sectors this week?
The best-performing sectors include Utilities, up over 2 per cent, followed by Information Technology, up over 1 per cent and Industrials, just in the green. The worst-performing sectors include Consumer Staples, down over 3 per cent, followed by Real Estate, down over 2 per cent and Materials, down over 1 per cent.
The best-performing stocks in the ASX top 100 include Reliance Worldwide, up over 21 per cent, followed by the A2 milk company, up over 16 per cent and Domino’s Pizza, up over 9 per cent. The worst-performing stocks include Lend Lease, down over 18 per cent, followed by Qantas and Nine Entertainment, as they are both down over 10 per cent.
What’s next for the Australian stock market?
With BHP, RIO and CBA all reporting weak earnings this week, it’s not surprising that the All-ordinaries index has posted a fall of around 0.5 per cent for the week. What I find interesting, though, is given the impact BHP, RIO and CBA have on the index given their weighting, a fall of 0.5 per cent is less than I would have expected. Given this, the slight pullback is a very bullish sign as it shows that the rest of the market is performing strongly. Therefore, I still anticipate the All-Ordinaries index to break the all-time high in the next week or so.
Once we break the all-time high, the important question most people will be asking is where to from here. You need to be watching for possible short-term resistance at 8,150 points, with a higher-end target at 8,750 points. The top-end target is a rise of around 10 per cent, and I expect to see that in the coming month before the next significant fall.
For now good luck and good trading.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
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