Last week came the news that the Australian stock exchange had one of its biggest one-day losses in the past decade. And then, over the next two days, it made back all those losses. Such is often the case with stock markets.
But the Australian stock market has, since the global financial crisis (GFC), mostly been bound in shallows and miseries. For those of us with superannuation accounts, the days of regular, strong annual growth are now almost a decade in the past.
Reporting stock exchange falls or surges is always fraught with danger. Falls during the morning can turn around and see trading end with the exchange pretty much square. On Friday, for example, after opening at 10am the ASX 200 fell 1.3% in the first half an hour, but by 10.45am was up 0.1%, and then by 2.30pm was back down 1%.
Even big daily falls that seem like the end of times can be recovered within a day or two, as occurred last week – and indeed has happened over the past month:
Over the past 15 years, the All Ordinaries Index has moved on average 0.7% each day – either up or down. The past month has seen the market become rather more volatile, with an average daily move of 1.3%.
While that can be interesting news for day traders, it can mean little for the rest of us. For all the news about big daily swings and roundabouts, the real news of the Australian stock exchange is how poor it has been performing for nearly a decade.
All of us with a superannuation account have no doubt heard about the need to take the long-term view with shares. Getting caught up in the day-to-day movement can miss the overall picture.
But determining what is the long term is tricky. You won’t want to use 12 months if you are encouraging people to invest – for there we see a fairly volatile picture as well:
In March this year it looked like there was a chance the All Ordinaries and ASX 200 might break through the 6,000 mark. And yet both are now hovering around 5,000. There is nothing overly important about the 6,000 barrier, other than it is a nice round number, but had it been reached it would have been the first time for seven years that the stock market had been above that level.
And this is the bigger problem with Australia’s market – right now it is at the same level it was roughly nine years ago:
That doesn’t mean no one has made any profit on the stock market over the past nine years, but for long-term investors it does not tell a particularly happy tale.
And, as holders of superannuation accounts, most of us are long-term investors now.
From 1997-98 to 2006-07, superannuation funds averaged an annual rate of return of 7.3%; from 2007-08 to 2012-13 the average was just 1.3%:
And the reality is that superannuation returns are strongly linked with the performance of the stock market:
That’s a worry for those in their mid to late 20s, whose superannuation has only just started; it’s also a worry for those near retirement, who 5 to 10 years ago would have expected to have more in their pot than they will now.
The Australian stock market has never fully recovered from the GFC. It didn’t involve the biggest post-1945 crash, but it has been among the longest running.
In October 2007, the All Ordinaries index reached 6,779; it is now 96 months since that peak, and we are nowhere near reaching it. By comparison, the stock market after the crash of 1987 – which saw the market plunge 24.9% in one day – returned to its pre-crash peak 76 months later (although it did then falter, and it was not until 100 months after October 1987 that the market stayed above the pre-crash peak).
The weak stock-market performance reflects that a big issue for Australia is not just weak economic growth, but negligible income growth:
The fall in our terms of trade (the price of our exports over our imports) is the biggest for 150 years. As the IMF noted in its recent evaluation of our economy, the past two decades of “exceptionally strong income growth” has been brought to a halt by “the waning resource investment boom and sharp fall in the terms of trade”.
The IMF suggests that “a cyclical recovery is likely in the near term, but over the medium term, income growth is likely to slow to a rate in line with other advanced economies”.
It is worth remembering that the boom in the stock market from 2003 to 2007 was highly unusual. Over the past 30 years the Australian stock market has grown on average by 8.1% every 12 months. From 2004 to the end of 2007 it was growing at an average rate of 19.6%. And this is where the long-term view comes in handy. Given most people will work for over 30 years, looking at the performance of the stock market since 1984 gives us a nice long-term view.
And what is striking is that, had the trend growth from 1984 to 2002 continued, the value of the stock exchange would be approximately where we find it today:
Thus, the long term is the way to look at the market. And with the economy growing weakly, national income barely at all, and another year with no improvement in the share market, thinking long term is definitely best when contemplating your superannuation returns.
