Greed Gives Way to Fear Amongst Stock Market Investors

If fear and greed are the dominant emotions in markets, hope reigns supreme in the field of politics.

Less than a week following Malcolm Turnbull’s coup to win the Prime Ministership, the country is infused with hope. That’s not terribly astonishing given what we’ve just been through.

Tony Abbott’s conservative reign all of a sudden seems like something out of the Ancient. His economic ignorance had been his downfall. For me, that will be forever captured in his reaction to a question about the risk to Australia from China’s economic downturn. According to Abbott, the Grocery Signal of Conduct would protect us.

No wonder we’re optimistic. Turnbull at least recognises the economic challenges Australia faces. That’s why Abbott as well as Hockey, the Treasurer, are both eliminated. Australia’s former economic team was a disaster.

Still, Scott Morrison, the new Treasurer, has a huge task in front of him. The reality of the situation may be plain to see, but the politics of producing change and reform will be very difficult.

The other shining light in Turnbull’s cabinet restructure over the past weekend is the handing over associated with defence responsibilities. Marise Payne is the very first women to ever hold the job of defence minister. Good on her. I’m responsible for succumbing to hope and gender prejudice here, but I’d much rather a women within the defence portfolio than a traditional male.

Once the enormity of the political coup settles lower though, the big question is, may Turnbull bring the electorate together with him. This will be the big challenge. Australia has had it good for a long time. The current house price boom in the face of economic decline just confirms for many people that there isn’t a problem.

Although RBA boss Glenn Stevens does not seem to think we’re in this bad state either. In his semi-annual testimony to the senate upon Friday, he was relatively sanguine about the prospects of the Foreign economy.

Keep in mind one of their roles is that of confidence maintainer. Whenever growth is fragile, you can’t have the boss of the RBA displaying signs of concern. In Friday’s Q&The session following his talk, a school student asked the way the economy will achieve 3% growth by 2017. Steven’s answer is, well, simply hopeful.

‘Growth of over three per cent is wanting to be achieved through 2017, according to the overview of the RBA. However with fewer mining projects on-going, falling commodity prices as well as deteriorating terms of trade, how do you predict this growth will be achieved?

‘Mr Stevens: It has to come from other parts of the economy than mining. The big question, of course, is really as mining slows down does the non-mining pick up? It is picking up–it is picking up a little bit more slowly than I would have liked but it is, I believe, picking up. We need that to help keep happening and strengthen further over the next several years. I think there are reasonable grounds to consider that it will do that, and the policy settings are certainly made to accommodate that and encourage it. What are those non-mining things?

‘We build houses, we build things other than mines, consumers do okay and so on, and hopefully a few of the export industries like travel and leisure, education, business services, actually some parts of manufacturing grow faster as they get help from the low exchange rate. I think all those things are starting to happen. However it is just a forecast, so we have to wait and seehow it turns out. I believe there are reasonable prospects we’ll get those outcomes.‘

As I said in the monthly issue associated with Crisis & Opportunity ?last week, this pick up in the non-mining part of the economy is very fragile indeed. The message from the stock market is that these non-mining industries point to a slowdown ahead.

I showed two crucial charts that hold the key to the Aussie economy. If they break beneath their support levels, we’re staring at our first recession in nearly a quarter of a century.

That’s the other challenge that Turnbull faces. Bringing about tough reforms in a changing market environment will make things more difficult. Global markets are in the process of changing from the bullish to a bearish mood.

For example, the US Federal Reserve left interest rates on hold last week. The decision resulted in a sell-off. What used to be bullish news is now bearish.

I stated on Friday how buying and selling volumes fell as the All of us market attempted to rally from its previous steep falls. That was a sign of unwillingness to buy from higher prices. And you know what? Volumes picked up again in Friday’s trading session in the US, because prices fell heavily. That points to a desire to sell the actual rallies, and a lack of buying enthusiasm.

This is how sentiment changes. It’s flowing through to the Aussie market this morning. At the open, the ASX 200 is lower 100 points, or almost 2%. The important support level of 5,000 points remains intact for now, but gravity seems to be getting the better of Aussie stocks.

Alas, there is no hope-fuelled Turnbull bounce this morning. Greed is giving method to fear amongst stock market traders. Is this the end of Australia’s ?economic golden run?

Cheers,

Greg