While stock pickers give their guidance for the S&P/ASX 200 (INDEXASX: XJO) in 2019, it’s important to take a look at what is going to drive the Australian stock market.
Drivers both domestically and from abroad
How our domestic economy runs in 2019 will directly impact our local share market but we also feed off strength from offshore markets such as the US who lead the rest of the world.
Australia is not in the same position as the US who is in a defined tightening cycle, meaning interest rates are rising.
The US central bank, the Federal Reserve, raised the target range for the federal funds rate by 25 basis points to 2.25-2.5% during its December meeting, its fourth hike of 2018.
Furthermore, the Federal Reserve foresees two more rate hikes in 2019.
Rates in Australia aren’t necessarily rising
The last interest rate hike in Australia was November 2010 and our last rate cut was August 2016.
Our interest rate has been at 1.5% since August 2016 and while the expectation is for Australia to follow suit with the US and start raising interest rates, we may not be ready.
The US economy was experiencing growth, lower unemployment levels and signs of inflation, which forced its central bank’s hand to begin their tightening cycle (rising interest rates).
Australia’s economy is experiencing positive signs of growth, unemployment and inflation but not yet to the same degree that warrants a rate hike according to our central bank, the RBA.
Snippets from the RBA’s December statement
The RBA’s Governor Philip Lowe in the December monthly statement said: “The Australian economy is performing well.
“The central scenario is for GDP growth to average around 3½% over this year and next, before slowing in 2020 due to slower growth in exports of resources.”
He added: “The outlook for the labour market remains positive. The unemployment rate is 5%, the lowest in six years.
“With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely.”
He also said: “Inflation remains low and stable. Over the past year, CPI inflation was 1.9% and in underlying terms inflation was 1¾%.
“Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual.
“The central scenario is for inflation to be 2¼% in 2019 and a bit higher in the following year.”
Housing market is key in 2019
Housing is very important for our domestic economy due to the ripple effects it has within our economy.
In a market of rising house prices, it is not just the home owner that experiences a positive wealth effect.
There is also the lender, the valuer, the mortgage broker, the real estate agent, the advertising, the tradesmen, the gardener, the insurance… the list goes on.
Let’s use an example of a person who bought a $1 million property with a $200,000 deposit ($200,000 equity, $800,000 debt).
If that house increased to $1.05 million in value, assuming the debt is the same, the equity component increases to $250,000, increasing the wealth by $50,000.
This person is a lot more likely to book a holiday, dine out at a restaurant, or pay to get their car washed.
If the housing market continues to fall, the wealth effect reverses and it can reach further across our economy than you may think.
Our central bank keeps a keen eye on housing
With housing being a large driver of our domestic economy, the RBA knows it must be well-informed on the state of the housing market to make policy decisions.
Lowe said in the December monthly statement: “Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low.
“Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend.
“The demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed.
“Growth in credit extended to owner-occupiers has eased to an annualised pace of 5–6%.
“Mortgage rates remain low, with competition strongest for borrowers of high credit quality.”