You won't be alone if you're feeling nervous about an impending market sell-off following the stellar gains on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index since the start of the year.
Some believe that our market has overshot on the upside given the expected slowdown in profit growth for corporate Australia and that shares are poised to fall in the near-term.
However, not all experts are in agreement with that bearish view. In fact, there are a few key factors that can keep equity markets rallying for a little while yet.
Don't be fooled into thinking that stocks can only rise on the back of strong profit growth. This is a very important driver for the rise in equity markets, particularly over the longer-term, but it isn't the only thing that excites the bulls.
The biggest large cap winners
Among the large cap ASX stocks, there are 6 that have delivered share price gains of over 20% in the past three months.
The top performer is the Fortescue Metals Group Limited (ASX: FMG) share price with a 57% gain followed by the Santos Ltd (ASX: STO) share price, QBE Insurance Group Ltd (ASX: QBE) share price, Rio Tinto Limited (ASX: RIO) share price, Goodman Group (ASX: GMG) share price and Brambles Limited (ASX: BXB) share price with increases of between 20% and 30%.
The risk-on mood isn't confined to the ASX either. The US benchmarks like the S&P 500 have also started 2019 on a strong footing.
Market tailwinds
Here's a few reasons why the party could continue:
- Weight of money: More money flowed into US equity funds in the week ending March 11 than at any time over the past 12-months (US$25.4 billion to be exact) as the S&P 500 enjoyed the best start of the year since 1991, according to Bloomberg. This bodes well for the US stock index and what's good for the goose is great news for the ASX as our market tends to take its lead from Wall Street.
- Falling bond yields: The 10-year government bond yields in the US and Australia are on the retreat. It wasn't that long ago that rising yields triggered a market correction, so it shouldn't be a surprise that the opposite is happening now. What's more, yields are unlikely to rise with the US Federal Reserve looking likely to stand pat on rates for the foreseeable future and the Reserve Bank of Australia (RBA) looking increasingly likely to cut rates. Low yields increase the relative attractiveness of equities.
- Looser money: Some would argue that the interest rate expectations from the Fed and RBA are already in the share prices of our stocks. I agree that a lot of this good news is already priced in the market, but the RBA and Fed may actually do more than investors think. For example, the Fed may stop unwinding its Quantitative Easing (QE) programs from the GFC to support growth and the RBA may feel compelled to increase liquidity (the supply of money) in our financial system because banks can't be trusted to pass on the full rate cut to borrowers. I am not saying these are probable outcomes but they can't be dismissed either. These additional stimuli aren't priced in to our markets.
- Election sweeteners: The looming federal election is touted as a negative for markets due to the uncertainty of the outcome. But often our market gets a nice kick as politicians throw cash around to win votes. This is very likely to happen when the Morrison government hands down the budget on April 2. The government needs to desperately shore up support and Treasury is flushed with cash given that commodity prices are well ahead of budget estimates. These targeted stimuli could deliver a boon for certain sectors of our economy.
I think the market is likely to stay buoyant for now but those who are overweight on equities (and with a shorter investment horizon) could consider taking some profit off the table after the budget is announced in two weeks as sentiment could change as we head into May.
