04

May

Written on 23/04/2020 by James Hodder


Markets typically have two lows after a big setback.  It is a very common pattern, sometimes called a double bottom the second bottom when it comes will likely be the end of the great COVID fall of March 2020. 

Recent History of Double Bottoms: the GFC Experience of 2007/8/9

The 1st “Low” in the 2007/8 GFC (highlighted in the insert)

In the Oct 2007 GFC/crash the first low was in Dec 2008 14 months after the first fall in October 2007 (time scale is one month per line.)  The hollow lines are an up month and the filled in ones are a down months!)

Above: The Second “Low”

The second bottom, the real, no kidding this is the real bottom, was in March 2009, 3 months later! 17 months after Oct 19th, 2007.

The pace of the rise (and the fall) will depend on the nature of the fall, and the level of damage done to markets/business/institutions by the thing that caused the fall in the first place. The GFC fall was quite a slow grinding decline, 17 months from top to bottom as you can see from the clip above. Banking in the US collapsed, US citizens personal balance sheets were decimated, no one knew what would happen next and whether the whole system would collapse. The long-term effects were profound and long lasting.

COVID 19 Fall

The COVID19 fall was super quick, the first phase was over in one month as you can see from the clip below which is drawn on the same time scale and are horizontally comparable.

Above: Taking a much closer view at the recent falls this time one day per line…

Above: Aust All Ords Last 12 months Daily Chart as at 1/5/2020

When will the second bottom be reached this time?  and at what level? It is anyone’s guess, but it will likely be weeks, at most, not months and may either be lower or higher than the March 23rd number. Once it is reached, markets will slowly climb out of it as they have always done. Not in a straight line, mind you but in a jagged saw tooth upward march, the way that they always do, as investors gradually climb the “wall of worry” back to (over) confidence again!


A Very Long-Term View is Needed.

Australian Shares are a great investment.  Even better if you can buy them at the bottom of a big fall.

To put all this recent history into proper context however, one needs to look as the All Ords Accumulation chart over the same 20 years, Accumulation meaning gains + reinvested cash dividends (but not Franking Credits!!)

Only gains appear on the price (XAO) charts featured above, the XAOAI accumulation chart (below) has cash dividends added. (not franking credits) Australian shares pay higher cash dividends than any other market in the world, so comparing performance only using price indices is VERY unfair to Australia! 


Fun fact!  Australia’s All Ords Accumulation index has soundly beaten the US market equivalent over this period! 😊 [20 years] (but not since March 2009. ☹ this is because the US accumulation [S&P500] market fell from 2000 to 2009 whereas Australia’s All Ords Accumulation went up over this period so US was coming from behind!

Above: All Ordinaries Australian Accumulation Index Twenty Year Chart 2000 to 2020

Reading the numbers off the chart the start was ~14,000 in Apr 2000 and 54,600 on the date of writing this represents a compound gain of 7% p.a. if you add franking credits its closer to 8% p.a.!  (assumes no tax or fees are payable)  More importantly your $54,000 + investment would have just paid you ~ $2,700 p.a. (5%)  in cash dividends and ~$790  p.a. in Franking credits ($1.5% ) a Total of  $3,490 p.a. or 25% on your original $14,000 purchase ! (figures assume no fees or tax along the way) # see note

# Note Based on the last 12 months of actual cash dividends paid and actual franking levels notified by a real fund, that has some (small) fees embedded it,  that closely tracks the ASX 200 index, a close relative of the All Ordinaries index. Future dividends will (likely) be lower than this, as companies conserve cash to rebuild their balance sheets post COVID shutdowns, but this level of dividends should return in the next 12 to 24 months.


Bank Deposits Going Nowhere Fast

The 90 Day Bill rate (three-month bank deposit rate) over this same 20-year period is charted below. Rates fell from ~ 6.5% to almost zero now! So, you might have been lucky to have averaged 3.5% p.a. with no franking, so a $14,000 deposit fully reinvested in a 90 day bank bill deposit account would have grown to… ~ $28,000  and be delivering income of $33.60 p.a. 0.12% p.a. in the next 12 months or 0.24% on your initial deposit of $14,000 ! (also, on a no fees or tax basis).

Above: Three Month Bank Deposit Rate % Twenty Year Chart 2000 to 2020

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