Sharemarket record rise continues but warning bells ring louder

Shares have ignored Covid chaos to trade near record highs, but there are a few important things investors should remember.

Sizzling. Blazing. Flaming. They’re all appropriate words to describe how Australa’s sharemarket has been going lately.

But they’re also words that eventually lead to stuff burning out or going cold, and that’s a key concern among many investors and super fund members right now.

The All Ordinaries index, which measures the value of 500 big Aussie stocks, is up 13 per cent since January and has bounced back a whopping 60 per cent since the March 2020 Covid crash.

All this at a time when the pandemic and lockdowns are hurting the economy and households more than they ever have.

Not even five straight days of falls last week has put a serious dent in the overall performance, and it’s a similar story for sharemarkets in the US, Britain and Europe.

Going up: stocks have been surging, but gravity will get them one day.

A positive profit reporting season by Australian companies this month has kept the momentum going, with rising profits reducing the perception that some stocks are crazily overvalued.

But as with all bull markets, a brick wall will be hit at some time in the future.

AMP Capital chief economist Shane Oliver says he has felt shares could suffer a pullback but adds there are good reasons for the strength: impressive profit reports, previous experience of economies bouncing back strongly after lockdowns, and confidence that vaccinated countries will recover.

Dr Oliver says the Reserve Bank of Australia’s reaction to the latest lockdowns should push its interest rate rises out to late 2023, while some investors expect more merger and acquisition activity because of the low cost of borrowing.

“While shares remain vulnerable to correction, the trend is likely to remain up,” he says.

If you’re a current shareholder or looking to become one, remember the important strategies of diversifying your investments in both the sharemarket and other assets, and spreading investment purchases over time to smooth out returns.

As to the big question of how high it can go?

No forecaster will give you a clear and accurate answer because nobody really knows, but as long as profits are rising and the future looks better than the present, shares could rise another 10 per cent, 20 per cent or more. Or it could fall 30 per cent-plus quickly, like it did last year.

Experienced investors have been through a few booms and busts since the 1990s, and by now have learned these three key factors.

• A rising stockmarket will often climb higher than anyone expects, thanks to the power of greed, and the fear of missing out (FOMO). Of course, they can also fall much further than expected, which is why it’s wise to stick to your strategy.

• Shares as a long-term investment have performed better than most other asset classes. They even eclipse real estate investment when you compare the holding costs of having a stake in BHP or CBA with a rental property that requires maintenance, insurance and a pile of other expenses.

• Sharemarkets are forward-looking, usually trying to predict where the economy and profits will be in a year or so. Twelve months from now, the painful lockdowns impacting a majority of Australians should be an unpleasant memory, which helps explain why we we’ve had record-high share prices despite so much economic and emotional turmoil.

Originally published as Sharemarket record rise continues but warning bells ring louder