Is the US stock market a crystal ball for the ASX?


Every day, we hear news about the performance of the US stock market, as if this is a magical crystal ball as to how the Australian market will unfold.

Indeed, some investors wait, in anticipation, for the news, so they can make decisions about what to do in our market. More recently, there has been speculation from retail investors that the US market will have the largest meltdown in history, with many Australian investors concerned that our market will follow.

So, will the US market crash and should investors take action to avoid getting caught out?

is wall street a crystal ball for the asx

I agree that all major moves down in price on world markets, including Australia, will generally follow the US market, however, the timing of the falls may be different, and the severity of the fall will vary to some degree compared to the US market.

For example, the largest crash in US history started in September 1929 and completed in July 1932 with the market falling 90% in price. The Australian market, on the other hand, started falling approximately seven months prior to the Dow Jones and around 50% in price into a low in August 1931.

Over the past 100 years, there have been many examples where our market has been out of sync with the US market, which is quite common.

This was evident with the move out of the COVID low whereby the Dow rose 102% in 22 months into January this year while our market only rose 79% over the same timeframe. I now believe there will be a changing of the guard and that our market will outperform the US market moving forward.

While it is possible that the S&P 500 could fall further, I doubt we will see a massive fall this year, as it has strong support around 3505 points, which is a fall of 11% from its current price. The same can be said for the Dow Jones, as it has good support around 27,500 points.

Realistically, if the masses are fearful of a significant fall, then it is only logical that they have already exited the market. Remember, crashes generally occur when optimism is high and investors are unaware, they don't usually crash when there is pessimism and fear.

That said, regardless of what the US market does, investors would be wise to focus on the stocks they hold and those they want to buy rather than the index, especially an index in another country. If you are worried about a market meltdown, then set an exit strategy like a simple stop loss on the shares you own, so you avoid getting caught out in a market decline.

The best and worst performing sectors this week

The best performing sectors include Consumer Staples, as it is just in the green followed by Healthcare and Industrials, which are both down more than 1%.

The worst performing sectors include Materials down more than 8% followed by Energy down more than 5% and Utilities down more than 3%.

The best performers in the S&P/ASX top 100 stocks include A2 Milk up more than 16% after releasing a good report this week followed by AMP and Endeavor Group, which are both up more than 3%.

The worst performing stocks include Evolution Mining down more than 12% followed by BHP Group, which is also down more than 12% after going ex-dividend this week, while Fortescue Metals is down 11%.

What's next for the Australian stock market

The All Ordinaries Index has continued to fall away as expected and confirmed its second consecutive week down with the index falling more than 3% so far. As mentioned previously, my preference was for the market to fall for at least another one or two weeks before rising again. If it does continue to fall into next week, I believe it will likely find support around 7000 points.

That said, it is possible the market will continue down for a few more weeks before finding support but I believe this is less likely.

Right now, investors would be wise to exit any stocks that trigger a sell and wait out the fall before buying again. To many get caught out trying to buy a bargain only to suffer further falls as they have bought too early. Again, while I am expecting the market to fall in the short term, I believe it will find support soon and be overall bullish for the remainder of this year.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.
Stephanie Skog
September 3, 2022 8.54am

Great input, thanks.