22 November 2023
After seven straight days of plummeting prices – plus a new 52-week low – Australian shares finally rebounded yesterday, with the ASX 200 ending the session up 1.41%, at 6523.8 points.
The Reserve Bank of Australia has released its latest quarterly Statement on Monetary Policy, which sets out the central bank’s assessment of current economic conditions, both domestic and international, along with its outlook for Australian inflation and output growth.
The report includes forecasts for several key data points out to the end of 2024 – by which time the RBA predicts unemployment will have risen to 4%, inflation will have dropped to 3% and annual GDP growth will be ticking along at a subdued 1.75%.
But what is the value of long-term forecasts in such a volatile environment? It’s interesting to note that this time last year, the RBA was expecting inflation would currently be below 2%.
So-called Black Swan events confound our attempts to predict the future. The metaphor is drawn from the discovery of black swans in Australia in the 1600s, prior to which it was generally believed (in Europe) that all swans were white.
While such events may seem obvious in hindsight – think the Global Financial Crisis – they are seldom foreseen.
A great exemplar of this can be found in the outlooks The Economist magazine issues each year. The one for 2020 contains no mention of the COVID-19 pandemic, which resulted in the biggest global economic contraction since the Great Depression.
And the outlook for 2022 failed to foresee Russia’s invasion of Ukraine in February, nor the resulting global financial turmoil.
(That said, The Economist did predict that meme stocks were here to stay in 2022, and they may have been more right about that, with Gamestop, Bed Bath & Beyond and AMC all sharply up in recent days.)
The XJO is continuing its winning streak so far this week, looking at continuing its third consecutive week in the green. The key 7000 resistance level was broken on Friday and so far the index has been able to hold this position. It seems like investors are seeing value in stocks after the June sell-off and anticipating strong financial stock performance throughout this earnings season.
Generally, earnings season is a volatile time on the markets, however implied volatility (IV) on the index is at 13%, the lowest seen in the past three months. Options premiums will be cheaper as IV decreases, therefore buying options contracts are currently cost-effective to trade.
Depending on how the XJO treats the 7000 now support level, we see further support at 6850 followed by the 50-day moving average (6793). If the market continues its rally, selling pressure is expected at the 200-day moving average (7171) and the pre-COVID high of 7200.
For investors, the mere existence of unforeseeable events implies that complex mathematical models, and surveys of expert opinion, can turn out no more useful than intuition. Diversification, rebalancing and maintaining a certain level of cash remain among the best protections available against uncertain events.
We have an upcoming webinar with a company led by some of the biggest names in Australian mining, including Justin Werner of $3 billion company Nickel Mines. Far East Gold (ASX: FEG) is a junior explorer that has seen its shares soar~120% since listing in March 2022 – preparing for initial drilling in its highly prospective Indonesian and Australian projects.
Tomorrow at 12pm (AEST), we will be joined by Far East Gold Chairman Paul Walker for what we think will be a fascinating conversation for potential investors. Click here to attend.
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