Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 219

US will fall more than Australia in next bust

Australia and the United States are similar in many ways. Both are former British colonies with relatively stable democracies, both have strong political, administrative, judicial and educational institutions, both have strong institutional protection of property rights and the rule of law, both have favourable demographics with relatively high immigration rates, and both have withstood invasions from foreigners (although indigenous natives in both countries would argue with this).

Remarkable long-term return similarities

The stock markets in both countries have generated the same level of real total returns (including dividends, after inflation). Both have averaged 6.5% per year above inflation since 1900. US shares have returned 1% pa lower total returns, but has had 1% lower inflation, so the real total returns after inflation have been the same. The mix of capital growth and dividends is also different, with US shares paying lower dividends but enjoying higher capital growth as a result.

The chart shows real total return series for Australian shares (green line) and American shares (red) since 1900. Although both markets have generated the same returns overall and have broadly followed same boom and bust cycles, they take turns to have the bigger boom and then the bigger bust. The lower section shows the rolling 5-year difference between returns from the two markets. Green positive bars are when Australian shares are beating American shares, and red negative bars are when American shares are winning. The red negative bars in the lower right show that US shares are winning in the current cycle.

Click image to enlarge

Boom and bust cycles

The main reason US shares have beaten Australian shares in recent years is that the US had a milder 2003-2007 boom than we did, and so it had a milder sell-off (even though the trigger for the GFC was the US housing market and US bank shenanigans). Australia also had a credit bubble in 2003-2007 but we had a China commodities boom as well. We are still recovering from our bigger bust while US shares are leading the next boom, which will be known as the great 2010s smart phone boom.

This tit-for-tat game has been going on for more than a century. The US had a bigger 1920s boom and therefore a bigger 1929 crash and early 1930s bust. Australia had a bigger 1960s mining/aerospace boom and early 1970s property boom and we had a bigger 1973-4 bust. Australia had a bigger mid-1980s entrepreneurial boom and so had further to fall in the 1987 crash. The US had a bigger late-1990s ‘dot com’ boom and so had further to all in the 2001-2 ‘tech wreck’ bust.

The market with the bigger boom falls further in the bust that follows. The US is leading the current boom and US shares are more over-priced than Australian shares, so US shares will have further to fall in the next bust.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

RELATED ARTICLES

Little room for error in equity markets now

GFC lessons 10 years on: can it happen again?

US shares at new highs, but where's Australia?

banner

Most viewed in recent weeks

How to include homes in the age pension assets test

A reader speaks out about the inequity of ignoring own homes in the assets test for the age pension, plus a proposal on how it could work politically. Take our survey on the merit of the policy. 

How much super is enough?

We cannot see into the future, but here are some general guidelines on how much to save in super, and then how much you can spend to enjoy a good retirement. Start as soon as possible.

Four reasons to engage a financial adviser

The value of financial advice is increasingly questioned after the Royal Commission and changes to advice business models, but the case for financial advice for many people remains strong.

Should you buy CBA PERLS XII Capital Notes?

CBA's latest PERLS offer is directly offered to hundreds of thousands of investors who already hold CBA shares or other PERLS securities. How does it compare with the rest of the hybrid market? 

Reader poll on the home in pension assets test

Two-thirds of the responses to our reader poll say the family home should be included in some way in the age pension assets test, but the comments show it is an emotional and divisive subject. 

Latest Updates

Retirement

OK Boomer: fessing up that we’ve had it good

The pre-Boomer generations faced global wars and depressions, but Australians born after 1946 have enjoyed prosperity. Superannuation, education, strong markets and surging property prices locked in gains.  

Investment strategies

Young women are investing more in shares

Young woment are showing increasing confidence in the sharemarket, promising a better future than the Boomers and Gen X women who hold significantly less assets than males of their generation.  

Investment strategies

Shorting deserves more respect

A fund manager that can short sell stocks with weak investment characteristics while reinvesting the proceeds in long positions in preferred stocks has a high degree of flexibility.

Economy

Policymakers fear cutting stimulus can lead to recession

Prolonging a recovery with stimulus could lead to a worse slump later. Even today, policymakers are haunted by actions taken in 1937 which led to a loss of production and jobs and a falling GDP.

Shares

Bank reporting season scorecard for FY19

Our annual scorecard for Australian banks shows earnings were hit by remediation costs and slow credit growth, but they are in good health and look attractive versus other listed companies. 

Sponsors

Alliances

Special eBooks

Specially-selected collections of the best articles 

Read more

Earn CPD Hours

Accredited CPD hours reading Firstlinks

Read more

Pandora Archive

Firstlinks articles are collected in Pandora, Australia's national archive.

Read more