A review of the performance charts for the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and the S&P 500 reveals that the ASX has underperformed the US market over one, five and 10 years. It also reveals that despite a lower return, the two markets have moved in a very similar trend.
With the S&P 500 hitting another new record high overnight, not only does the Australian market have some serious catching up to do to reach its own new, all-time high, but it also begs the question whether the S&P can continue to rally?
Jeremy Grantham, the co-founder of the $117 billion fund manager GMO was recently interviewed by Fortune magazine; while Grantham is firmly of the view that tough times are ahead for investors and that the US Federal Reserve's attempts to 'save' the economy have actually set it up for a massive and spectacular failure, in the near term Grantham thinks the 'party' can continue and the US market could easily go 25% higher (well into bubble territory) before things ultimately unravel.
Given the ASX's trend of taking its lead from the US market and also given the ASX is still around 18% below its October 2007 high, it seems quite possible that the ASX could rally 25% should the US markets do so.
Three stocks that would be major beneficiaries of a continued rise in equity markets are Macquarie Group Ltd (ASX: MQG), Magellan Financial Group Ltd (ASX: MFG) and Platinum Asset Management Limited (ASX: PTM). Importantly, these three companies are all well managed and survived the GFC which provides a degree of comfort should the world experience another severe financial event in the coming years.
For conservative investors however, focussing on protecting your downside, rather than enjoying the final stage of the 'party' is more important. Tried and true defensive stocks like Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) are likely a safer place to be.
Foolish takeaway
While Grantham won't be surprised to see the S&P 500 hit 2,350 points; over the next seven years he is predicting negative returns. In his view, "the next bust will be unlike any other, because the Fed and other central banks around the world have taken on all this leverage…….It's going to be very painful for investors."
