Bulls are back as market cracks 5000
Buoyed by Commonwealth Bank's strong half-year results, the benchmark S&P/ASX 200 Index jumped 1 per cent higher to close at 5003.7.
The last time the bourse was this high was in September 2008, and it was also the last time it had closed over 5000 since April 2010.
The rally, which has buoyed investor hopes of a return of a bull market, is a substantial turnaround from a low of 3145.5 points, hit in the depths of the global financial crisis.
The strong rally on Wednesday had much to do with Commonwealth Bank's record half-year profit of $3.78 billion, which beat market expectations and took the bank's market capitalisation to $108 billion. It helped shares in the country's biggest bank rally and the rest of the financial sector followed.
The local market has surged 25 per cent since June last year, encouraging sharemarket bulls to predict that investors could continue to see further gains.
But David Cassidy, at UBS, said it was a sign that things had calmed down in Europe and the US, and that Chinese growth had stabilised.
"The rally of the last six months has taken us up to the fair value area now, [but] to move beyond that you'd actually have to see growth accelerate, both globally and to some extent domestically," he said.
"You're starting to see some of the business and consumer confidence indicators pick up, even though I think the reality is that the domestic and global economies are still a bit on the sluggish side."
But analysts said investors appeared more upbeat this time, given global economic conditions were much calmer, so the market was benefiting from a much more positive earnings outlook.
Deutsche Bank equities strategist Tim Baker said the rally has been driven by an expectation of the health of the global economy finally improving.
"Interest rates are on the way down, China's had the leadership transition, the US has delayed the debt ceiling, Europe and the ECB's promise to do whatever it takes. So the accumulation of those events has got people a bit more upbeat on the earnings outlook," Mr Baker said.
Some traders expect the market to move higher over the next six months.
"It's a good opportunity with an election and a weaker Aussie dollar later in the year to break through it," RBS Morgans senior trader Luke McElwaine said.
"It wouldn't surprise me, with a weaker Australian dollar, if we really start to motor to the mid-5000s and make up some of that lost ground when you compare us to the US market."
It is the third time that the S&P/ASX 200 has flirted with the 5000-point level since the market bottomed in early 2009.
The first time, in April 2010, the market closed at 5001.9 points but quickly fell away as global economic conditions squeezed life from the rally.
At the time, the Reserve Bank was near the end of a 1.50 percentage point rate increase cycle, the Iceland volcanic ash cloud was wreaking havoc with the global airline industry, and BP's Deepwater Horizon offshore drilling platform exploded off the coast of Louisiana.
The second time, in April 2011, the market closed at 4971.2 points then fell away again. At the time, S&P had lowered its US sovereign debt rating to negative, fears were increasing of a Greek restructure, and the world was reeling from the Japanese tsunami and nuclear crisis.
Frequently Asked Questions about this Article…
Australia's sharemarket closed above the psychologically important 5,000-point level, with the S&P/ASX 200 finishing at 5,003.7 — its highest close in more than four years. The index jumped about 1% on the day, helped by strong results from major companies and broad gains in the financial sector.
Commonwealth Bank reported a record half-year profit of $3.78 billion that beat market expectations and lifted its market capitalisation to roughly $108 billion. The bank's strong result drove a rally in its shares and helped lift the wider financial sector, which in turn supported the ASX 200's move past 5,000 points.
The milestone has buoyed hopes that a bull market may be returning — the local market has surged about 25% since June last year — but analysts in the article caution this isn't definitive. UBS noted the market has reached a 'fair value' area and further gains would likely require accelerating global and domestic growth, so investors should view the milestone as encouraging but not conclusive proof of a sustained bull market.
The financial sector led the recent gains, with Commonwealth Bank's strong half-year profit acting as a key catalyst that helped lift bank stocks and the broader financial sector across the ASX.
Analysts in the article cited calmer conditions in Europe and the US, stabilising Chinese growth, expectations that interest rates are on the way down, a leadership transition in China, a delayed US debt ceiling showdown, and the European Central Bank's commitment to act — all factors helping improve the global earnings outlook and support the rally.
The article points out that past attempts to hold 5,000 failed when global shocks and negative economic news hit — examples include disruptive events (like volcanic ash and the Deepwater Horizon disaster) and crises (US sovereign rating downgrade, Greek debt fears, the Japanese tsunami). Continued sluggish domestic or global growth or fresh geopolitical or economic shocks could derail gains.
Some traders quoted in the article believe so. RBS Morgans' senior trader said a weaker Australian dollar combined with an election later in the year could create an opportunity for the market to push into the mid-5,000s, potentially helping the ASX regain ground relative to markets like the US.
Everyday investors can take cautious optimism from the milestone: it reflects stronger company earnings and calmer global conditions that have improved sentiment, and the market has risen about 25% since last June. At the same time, the article highlights that the domestic and global economies remain somewhat sluggish and past rallies have reversed when new shocks arrived, so keeping an eye on earnings trends and global developments is sensible.
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