It's official, the ASX All Ordinaries (INDEXASX: XAO) index yesterday closed at a new record high. Not an 'it's highest level since…" high but the new, never-before-reached, final frontier kind of high.
The All Ords or the ASX 200 (INDEXASX: XJO) index haven't approached these kind of levels since November 2007, and we all know what happened soon after. But let's take a closer look at what this means for stocks – because last time, things looks a little different.
Then and now
In November 2007, interest rates had just been increased to 6.75%, the economy was galloping, inflation was running at about 3%, unemployment was at record lows and our dollar was buying 93 US cents.
Fast forward to 2019, and this seems a bit strange. The unemployment level is… ok, but statistics show we have high levels of under-employment (lots of people want to work more than they can). Inflation is almost non-existent, the Aussie dollar is buying around 69 US cents and interest rates are at record-lows. But never fear – property is still strong and the stock market is at record highs! To this writer, the current situation is worrisome. 'Normal' thinking would indicate that a healthy stock market is held up by a healthy economy, but on these numbers and the Reserve Bank of Australia's latest minutes, the economy isn't looking too crash hot – more like sluggish.
What is happening indicates a rush of cash into ASX shares because the stock market is now the only place where you can get a decent yield – low interest rates have meant that cash and debt instruments like term deposits and bonds are now yielding close to zero in real terms. Prices may be becoming artificially inflated beyond intrinsic value and this could mean some kind of bubble might form.
Foolish takeaway
At the end of the day, no one can predict what the stock market will do next, but I think now is a good time to be cautious and not get carried away by the new highs we are seeing. As Warren Buffett says, the time to be fearful is when others are greedy and a galloping stock market can indicate greed. I'm not advocating anyone sell out and go to cash, but keeping some extra on the side might be a good idea. Above all, make sure your hard-earned money is sitting with quality ASX companies with sustainable dividends that will survive (or even thrive) in good times and in bad.
