Food for Thought – Taking Stock of the Rally

Investors have had a happy start to the new year, with equity markets extending their post-Trump election rally.

 

The gains have come on the back of broadly better economic news offshore and prospects for fiscal stimulus in the US. At the time of writing (13 January), however, with the S&P/ASX 200 Index already closing in on the top end of our 2017 forecast market range of 5,000–5,800 questions are being raised as to whether the market has over-reached itself.

 

In fact, we see some arguments for a period of consolidation in the coming weeks, including:

 

  1. Investors having turned net bullish, which usually co-incides with an easing in market returns;
  2. Markets are at risk of outpacing changes in the growth outlook and economic surprises are approaching a short-term peak;
  3. Local economic data has been soft, and there is a lack of conviction on the strength of the outlook in Australia; and
  4. Recent commodity price gains, which have supported positive earnings revisions, particularly in iron ore and coal, have started to stall or correct ahead of a seasonally quieter period for China demand.

Food for Thought is a regular column from Ord Minnett Senior Investment Analyst Sze Chuah. Her column is published in the Ords Weekly document on Fridays.

 

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