There’s a saying in Australia that most stock market watchers are familiar with: ‘When the US sneezes, Australia catches a cold.’
And until a couple of years ago, that felt true. If the US stock market experienced a 1% selloff, you could bet the Aussie market would fall by that and more. Same applied if the US market rallied. A little spurt in the US market would give Aussie investors a spring in their step, and they too would pile in.
And then, sometime before the end of 2015, the two markets diverged. You can see this in the chart below:
Dow Jones and S&P/ASX 200
[Click to enlarge]
The Dow Jones (orange line) started marching higher towards the end of 2015 — 12 months before US President Donald Trump was elected. And the S&P/ASX 200 (blue line) stopped tracking it.
What’s happened since then has been the US market’s incredible, rocket-like rise to new highs.
Helping the US market move higher is the fact that we find ourselves watching their third-quarter earnings season unfold. Much last like the previous quarter, companies are reporting positive results, taking both the Dow Jones and S&P 500 higher.
What’s interesting to observe however, has been the dominance of tech stocks in the US. The big five tech stocks have seen incredible gains as measured by using their 52-week low:
- Apple Inc. [NASDAQ:AAPL]: 56%
- Amazon.com, Inc. [NASDAQ:AMZN]: 44%
- Facebook, Inc. [NASDAQ:FB]: 44%
- Microsoft Corporation [NASDAQ:MSFT]: 39%
- Alphabet Inc. [NASDAQ:GOOGL]: 33%
Given that these are mature companies, the rally is quite surprising. More so when you factor in that these behemoths of industry are now collectively worth US$ 3 trillion.
Microsoft came out last week with US$24.5 billion (AU$32 billion) in revenue, well ahead of the US$23.56 billion (AU$30 billion) it told the market to expect. More importantly, the company actually met its cloud-computing revenue targets a few quarters ahead of its deadline.
Then we’ve got Amazon. Now, Amazon has a habit of reinvesting profits back into the business rather than paying out investors with dividends. But this time, the company clearly impressed investors by growing revenues 34% year-on-year to an incredible US$43.7 billion (AU$57 billion). The share price rallied 13% as the company beat analysts’ expectations by more than a billion dollars.
Finally, we have Alphabet, the parent company of Google. Again, we have another company that defied market expectations by reporting revenues of US$27.8 billion (AU$36.30 billion), half a billion ahead of the expected US$27.2 billion (AU$35.51). Oh, and if you want Alphabet shares, open your wallet. This announcement pushed the share price well above the US$1,000 (AU$1,305) per share mark.
Over the next two weeks, both Apple and Facebook will announce their results. If they beat expectations like their giant tech counterparts, chances are their respective share price will soar on the news.
This is all well and good for the US shareholders. The problem is, not every investor can afford to rush and buy shares when they are that expensive.
With tech companies dominating the US market at the moment, it tells us that there may be opportunities for investors in the smaller sector of the market.
The problem, however, has been that the Aussie market hasn’t done a great deal of late. But if you look at the chart below, that may be about to change…
S&P/ASX 200 [XJO]
Source: Yahoo Finance
[Click to enlarge]
In spite of US markets hitting new highs weekly, the XJO has been stuck in a frustrating 150-odd-point range since April this year. Things may be about to change though. A couple of weeks ago, the broader Aussie market finally broke out of its funk, and pushed above 5800 points, remaining there for the first time in four months. That’s left the index only 40 points away from the very important psychological level of 6000 points. A point the index hasn’t been at in almost a decade.
This move higher is good news for investors. Chances are if you are a holder of blue-chip stocks, they are going to rise alongside the index. So, the gains you could potentially get will reflect the broader market.
But what if blue chips aren’t your thing? The smaller end of the market — where you’ll find the small-to-mid-cap stocks — are already rallying. The Small Ordinaries index [AXSO] is up 7.47% in the year-to-date. Which is more than double the S&P/ASX 200’s paltry 3.1% in the same period.
This means that, if you want the chance to potentially make bigger gains in the stock market, you may have to look outside the banking and mining stocks that dominate the Aussie market. Where to start? Right here.
Editor, Markets & Money