Every day, we hear news about the performance of the US stock market, as if this is a magical crystal ball as to how the Australian market will unfold. Indeed, some investors wait in anticipation for the news so they can make decisions about what to do in our market.
More recently, there has been speculation from retail investors that the US market will have the largest meltdown in history, with many Australian investors concerned that our market will follow. So, will the US market crash and should investors take action to avoid getting caught out?
I agree that all major moves down in price on world markets, including Australia, will generally follow the US market, but the timing of the falls may be different, and the severity of the fall will vary to some degree compared to the US market.
For example, the largest crash in US history started in September 1929 and wound up in July 1932 with the market falling 90% in price. The Australian market, on the other hand, started falling approximately seven months prior to the Dow Jones and around 50% in price into a low in August 1931.
Over the past 100 years, there have been many examples where our market has been out of sync with the US market, which is quite common. This was evident with the move out of the COVID low, where the Dow rose 102% in 22 months into January this year while our market only rose 79% over the same timeframe.
I now believe there will be a changing of the guard and that our market will outperform the US market moving forward.
While it is possible that the S&P 500 could fall further, I doubt we will see a massive fall this year, as it has strong support, at around 3,505 points, which is a fall of 11% from its current price. The same can be said for the Dow Jones, as it has good support, at around 27,500 points.
Realistically, if the masses are fearful of a significant fall, then it is only logical that they have already exited the market. Remember, crashes generally occur when optimism is high and investors are unaware, they don’t usually crash when there is pessimism and fear.
That said, regardless of what the US market does, investors would be wise to focus on the stocks they hold and those they want to buy rather than the index, especially an index in another country.
If you are worried about a market meltdown, then set an exit strategy like a simple stop loss on the shares you own, so you avoid getting caught out in a market decline.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate YourWealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au