MARKETS SPECTATOR: Rocky months ahead

As we near the end of March, the market is so far down about 2.4 per cent, give or take, which makes it the worst monthly performance in 11 months. But following a 4.9 per cent gain in January and 5.6 per cent rise in February it’s been welcomed by all, even if many would have liked to have seen it pull back further. 

As we head into the Easter long weekend, we’ve already seen volumes drop considerably as this is a time many take extended breaks. The big question on everyone’s mind is 'where to next'. By mid-year, I think we’ll be modestly lower from where we are now but I do think the bears are going to have a tough time driving stocks lower over the next month or so due to a number of reasons I’ll explain below.

With many people taking extended breaks and market volumes on the low side, the next major event for equity markets is probably going to be the upcoming US second quarter earnings season, which kicks off on April 8. So far markets seem to have weathered the latest spotfire in Europe so it now looks like attention will turn to US earnings in just over a week.

With US economic data continuing to point towards a strengthening recovery, we’re likely to see a relatively good US reporting season, especially if we start to see a pickup in the tone of company outlook statements. So far it looks like expectations are reasonable so there is every chance to expect another stronger-than-expected round of earnings. If this is the case, it will likely drown out any other concerns and continue to support equity prices.

So while a solid US earnings season would support stocks locally, there are a number of other factors that are going to make it tough going for the bears. 

Over the next three weeks, $14 billion in dividends is due to be paid by ASX-listed companies, with a significant chunk of that likely to be reinvested back into the market. This puts an even bigger bid under stocks as it is in addition to the normal monthly flow of superannuation contributions that make their way into the equity market.

This leads me to my next point. Historically speaking, April tends to be the best performing month for Australian equities, rising 85 per cent of the time over the last 20 years and adding 3 per cent on average. The huge inflow of dividends probably plays a large role in this.

So given this, some might be wondering why the market won’t move meaningfully higher over the next couple of months. Well, it might bounce a little in April but the big issue is the dire sentiment surrounding the miners and the ability for them to weigh heavily overall given their large index weightings.

While the banks will remain well supported with modest upside potential, I get the feeling the market is reluctant to push them meaningfully higher from here. That means for the market to move significantly higher, we’re going to need to see a decent contribution from the mining sector. At the moment, I just can’t see it happening given the dire state of sentiment.

There are many issues concerning investors but probably the biggest is the perennial question about China and inflation. In fact, for the first time since 2011 the Chinese swap market is now signalling interest rate increases, which is going to keep a lid on any mining recovery for a few more months at least.

Those pure contrarians out there would be licking their lips with what’s on offer in the resources space at the moment. However, my view is that it is still too early and that there is probably further downside before mining stocks bottom in the second half of the year.