US v Australian share markets: Don't compare apples with oranges

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In recent months, there has been a lot of talk about the US stock market crashing, which has Australian investors worried that we may experience a similar event.

However, while the Australian market broadly moves in line with the US, we also run our race. Therefore, just because the Dow or S&P 500 may fall, it does not mean our market will do the same.

Recently, the Boston Consulting Group released their 2021 list of most innovative companies and there were no surprises with Apple, Alphabet (Google), Amazon and Microsoft all in the top four followed by Tesla.

market wrap us v australian share market dont compare apples with oranges

It may surprise you to know, according to Bloomberg, that these top four companies accounted for around 25% of growth in the US market in the past quarter.

When looking at the S&P 500, it has only risen approximately 5% since May 1, 2021, yet Apple is up more than 10%, while Google is up more than 13%, Amazon up more than 4% and Microsoft is up more than 14% more than the same period, which implies these companies have been holding up the index and that overall the US market is not that strong.

That said, this doesn't mean the US market is ready to crash, as rampant speculation and the broader market rising strongly would typically proceed a crash. So, while the US market may fall, in my opinion, a crash is unlikely.

So what does this mean for the Australian market?

Our market is driven largely by the Financial and Materials sector, which is roughly 50% of the total market capitalisation with financials dominating, as it contributes to around two-thirds of this figure.

This year the All-Ordinaries Index has risen more than 12% while the Materials and Financial sectors have both risen around 17%.

Materials only recently broke above their previous all-time high from early 2008 while the Financial sector is still trading 15% below its previous all-time high set back in early 2008.

This explains why our market has lagged the US market in terms of growth for quite a few years, and it also explains why our market is unlikely to crash.

For the Australian market to crash, both sectors would need to fall heavily and given how they have been unfolding, I do not see this occurring any time soon. Similarly, for the US market to crash, we would need to not only see the top four stocks fall heavily but several others such as Facebook and other large technology stocks together with the large financial and energy stocks.

Therefore, while the US market may slow and even fall somewhat, a crash, which is in the vicinity of 25% or more seems unlikely.

Best and worst performing sectors this week

The best-performing sectors this week include Materials up more than 3% followed by Communication Services, which is just in the green and Industrials, as it is just in the red. The worst performing sectors include Utilities down more than 1% followed by Consumer Staples and Energy.

The best performers in the ASX/S&P top 100 stocks include Lynas Rare Earth and Oz Minerals, which are both up more than 11% followed by Orora up more than 6%.

The worst-performing stocks include Crown Resorts down more than 12% followed by The a2 Milk Company down more than 9% with AGL and IDP Education both down more than 6%.

What's next for the Australian share market

Yet again, the Australian stock market has failed to make a strong move in any direction. After rising strongly to achieve a new-all time high last week, it has failed to push higher this week.

Over the past five trading days, the All Ordinaries Index has risen less than 0.50% and over the past 32 trading days, it has risen less than 1%.

As I mentioned in my previous reports, the market has continued to have a mind of its own all year and is often doing the unexpected.

This lack of direction in our market is frustrating for investors and traders, as it appears that we are collectively waiting for a sign that our economy is either going to be very good or very bad in the coming year before we make a decision to buy or sell.

This could be the reason why the volume of shares traded on many of our top stocks is down from 2020.

This state of uncertainty in our market is likely to persist, at least until we have more certainty about COVID and the fear of perpetual lockdowns affecting our livelihoods.

Therefore, I recommend investors become much more selective in the stocks they hold, as a broad-based approach to profiting right now is not the answer.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.