News
Personal Finance
Splitting Assests after Divorce
Tax Changes to Provide Opportunities
Share Market Outlook - Dec 1998
The Share Market - Where Now? (Aug 98)
Knock-on Effect
Negative Gearing:Shares Versus Property
New Approach to Negative Gearing
Putting Money into your Spouse's Super
Economic growth has been ticking away at a respectable speed for seven years now and unemployment is low - just a touch above five per cent. According to the current orthodoxy, low unemployment and strong growth should lead to higher inflation. In turn higher inflation leads to higher interest rates and (usually) panic on the bond and share markets.
But puzzlingly, there are no signs of inflation and as a consequence share prices have been booming. This peculiar performance of the US economy is forcing a rethink of economic policy by such notable institutions as the powerful US Federal Reserve.
Is inflation dead as some economists are saying? If so what does it mean for the major financial markets around the world? Or will it be like those predictable horror movie plots? You finally take out the monster but as soon as you turn your back it stirs, regains a new energy and attacks viciously from behind.
US Federal Reserve Chairman Dr Alan Greenspan, after some worrying comments earlier in the year, now appears relaxed about the prospects of renewed inflation. He believes that the wide application of computer technology is allowing the US economy to grow strongly without inflation. Consequently the American share market, for the next few months at least appears tobe saved from any harsh interest rate hikes.
But this does not mean the share market will be spared from any shocks. If the reports are right, the US market is becoming frenzied with more than $US10 billion a month pouring into US mutual funds (similar to unit trusts) from small investors, many of whom have never experienced a prolonged share market downturn. This could be a pointer to the beginning of the end for the current share market cycle.
A typical market cycle starts with a sharp boost to share prices as the economy emerges from recession. This is followed by a cooling off period as investors wait for the promised profit improvements to emerge. A mid-cycle burst of activity is followed by another cooling period. The last stage, surging prices, has been dubbed the Porsche stage. Emotion and greed gives way to common sense and in a buying frenzy investors buy anything that moves in fear of missing out.
Inevitably of course, then comes the collapse and it may only take a small interest rate rise to spark it. Some respected analysts who a year ago were in the optimistic camp now believe the end for the current cycle is nigh.
Fortunately for Australia, a collapse in Wall Street may not be reflected in full this time round. In the four years ahead of the 1987 share crash Australian share prices rose twice as fast as those in the US - and fell twice as much after the crash. But in the past four years the Australian market has risen only 40 per cent compared with more than a doubling of prices in the US.
Hopefully this means that when the crash comes, we may escape the worst of it. But then current orthodoxy is under challenge, so anything could happen.
|
Return to top of page This page was last built on 1/9/99; 7:57:10 AM. It was originally posted on 1/5/98; 2:07:24 PM. Webmaster:  lemlink@medicineau.net.au |
 |
Index |  |
Negative Gearing:Shares Versus Property |
MedicineAu