With the first month of the new year coming to a close, what can the performance of the share market so far tell us about what the year ahead may hold for investors and traders?
At this same time last year I talked about the concept of the January effect.
Historically, a positive performance in the month of January has meant an 80% chance that the year ahead will be a positive one.
Then again, previous years have shown us that when January is a negative month, then it is still likely that the year will finish in the black. Six out of the last seven years which had a negative January performance still saw a positive yearly result overall.
Which means not much can be concluded from the numbers. So, rather than focusing on historical trends, the sharemarket tends to look to the future.
Let's examine at what you should look out for in 2010.
Australian economy
In Australia, recent data suggests strength in the economy. We've seen stronger than expected GDP and employment numbers. The Australian economy should be helped by the resources sector with much of that dependent on demand from China.
Recently, the IMF released its World Economic Outlook. It upgraded its outlook for Australia by 0.5% for 2010 to growth of 2.5% and then growth of 3% for 2011.
The strength in the Australian economy means that the Reserve Bank will most likely continue to raise interest rates to fight off inflation and allow Australia to grow at a sustainable rate.
Currency effects
In terms of the sharemarket, one of the biggest impacts on companies in 2009 was the high Australian currency. The high currency is bad news for businesses that do business offshore.
We saw companies such as QBE Insurance, Fosters and CSL significantly underperform in the Australian sharemarket in 2009. The fact is that while small adjustments have been made for the higher currency in this year's forecasts, many companies are still using a very low Australian currency number in terms of next year's forecasts. If the Australian dollar remains strong, then we could see an impact on profits from revised currency expectations.
Australian sharemarket
While we have seen a poor start for 2010, from a historical prospective, the sharemarket is still looking cheap. As you can see from the chart below, the correction that we've seen in January needs to be put in perspective. The sharemarket increased 57% from the low in March to the high of the cycle in January 2010.
It's only normal that the sharemarket would pause and refresh for 2010.
With the sharemarket still looking relatively cheap, it would be easy to be a bear in this environment, but really, the time to be a bear was in late 2007 and in 2008.
Despite the initial weakness, it's still time to focus on the recovery story. The sharemarket will always pull back even when moving upwards. The key is to know when it's pulling back and when it's in a longer term downtrend.
At the moment, it looks like a healthy correction from the huge performance in 2009.
Wishing you a prosperous new year and a great start to a new decade.
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