Chief economist update: Australian bull market here we come

Just a weetle more, a weetle more ... a little more push higher and sooner than soon, the All Ordinaries index would satisfy the technical definition of a bull market - a 20% rally from its nearest low - and onwards towards topping its record high of 6,853.57 points recorded on 1 November 2007.

The All Ordinaries has outperformed both developed and emerging market equites this year to date, rising by 17.8% versus 13.4% and 8%, respectively, with both big and small capitalisation stocks registering strong gains. The S&P/ASX 100 index has risen by 7.8% so far this year and the Small Ordinaries index has rallied by 18.1%.

Not long now before the rally becomes a bull market - just another 1.8% gain in the All Ords and we're into a bull run. Ole, ole, ole, ole!

This is because the entry into a bull market prompts widespread optimism, encouraging investors to anticipate further gains and therefore increased buy orders, that ultimately sends stock prices into a self-sustaining climb to higher highs.

The domestic bourse's recent impetus has undoubtedly been triggered by the Reserve Bank of Australia's (RBA) decision to cut the official cash rate to a new record low of 1.25% on the June 4 ... plus, expectations for at least one more rate reduction this year.

But is this something to be joyful about? After all, the RBA wouldn't be lowering borrowing costs if the economy was progressing smoothly. The economy grew by just 1.8% in the March 2019 quarter - its slowest annual rate in nearly 10 years - with household consumption's (which accounts for around 60% of the economy) contribution to growth halved to 0.1 percentage point from 0.2% in the December 2018 quarter. The slowdown in annual retail sales growth to 2.8% in April from 3.5%, along with the drop in consumer confidence portends continuing weakness in household spending.

This isn't a good omen for business profitability - that, which drives stock market prices. This is captured by the latest NAB Business Survey that showed business conditions weakened in May due to big drops in trading conditions and profitability. While business confidence surged (due to RBA rate cut and elimination of political uncertainty following the May 18 Federal elections), the lead from the continued decline in forward orders is not encouraging.

The only logical explanation for the Australian equity markets recent rally is that on a relative basis the domestic economy's outlook fares relatively better than the US (yield curve inversion predicts a coming recession); the low growth economies of the Eurozone and Japan and though it's at par with UK growth, there's still the lingering Brexit uncertainty there.

Also, Australia is not on Trump's tariff sights and the cheapening of the Australian dollar is partially negating the downdraft from slower growth and slower trade.

Lastly, the RBA's rate cut (plus expectations for at least one more) has forced savers into the higher yielding stock market.

However, current equity market valuation shows the local bourse is now at overvalued levels.

Read more: Reserve Bank of AustraliaASXNAB Business SurveyS&P
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