However, the sharp upwards move along with increasingly stretched valuations leave the market frothy and somewhat vulnerable to shocks, and there are plenty of catalysts for potential drawdown, geopolitical, economic, policy or otherwise. The upcoming earnings season could also be one of those catalysts and come February market performance and economic realities may be forced to converge once more.
Aussie stocks are on track for some uninspiring profit growth, battling a cautious consumer and a weak domestic economy, notwithstanding an unprecedented bushfire season that only reinforces those soft conditions. The damaging disruption to tourism, regional trade, construction activity, agricultural productivity and retail/eating out, against the backdrop of an already cautious consumer, will not only hit those areas most affected, but also major East Coast cities engulfed by thick smoke. This presents problems for a raft of Australian companies. Retailers who have already been doing it tough have to contend with an already anaemic consumption spend, distressed further by the devastating bushfires. The dampened confidence along with a reluctance to spend whilst the nation is in crisis will have hit retailers in what is seasonally a busy period. Tourism and travel will also feel the pinch as mass evacuations along the east coast, thick smoke, and raging fires impacts travel plans and business operations. Lower rates also present profit headwinds for the for the banks, which make up a large portion of the index, not to mention a mountain of scandals and misconduct charges which also add to the patchy earnings picture.
But as we wrote yesterday, for long term investors, these headwinds should not deter. Monetary policy remains a powerful determinant of asset prices, and as we progress through the year, continued central bank liquidity injections will lend underlying support to equity markets. With liquidity being pumped and low yields forcing risk seeking behaviour, dip buyers are there on the sidelines ready to step in as valuations correct which lends an underlying support to global markets. Monetary policymakers have already exhibited their willingness to intervene with added stimulus measures in an attempt to extend the cycle, so, for as long as investors feel like central banks have their back and policy rates remain low there will be upside for equities.