Shares on fire: A new bull market?

Australia looks well set

Amidst all the doom and gloom recently, it’s been easy to miss the fact that the sharemarket has gained 12%, in little more than 4 months.

Since the beginning of June, the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) has risen over 12%, and that’s despite global economic issues that are dragging on. Europe’s sovereign debt crisis continues and the US recovery may be fragile, with concerns over its approaching ‘fiscal cliff’ (automatic government spending cuts, expiry of tax cuts and some tax increases).

Australia has so far been fairly immune to the global economic issues, despite falling commodity prices, and structural and cyclical issues affecting our construction, media and retail sectors. Stockland’s (ASX: SGP) CEO has said this is the worst new housing market he has seen in 20 years, while Fairfax Media Limited (ASX: FXJ) has reported that this is the worst advertising market they have seen in years. Two of our largest retailers, David Jones Limited (ASX: DJS) and Myer Holdings (ASX: MYR) have seen their earnings slashed and their share prices have followed profits down.

Despite those issues, unemployment has hardly budged and remains around 5%, the Australian dollar continues to trade above parity against the greenback, despite cuts in official interest rates, and our government debt levels remain fairly low, compared to other industrialised nations.

So is this the start of a new bull market, a temporary Santa Claus rally into Christmas, or a temporary respite?

While China’s growth has slowed, the country is still expected to grow its GDP by over 7% per year, which is amongst the highest in the world, according to a recent International Monetary Fund report. While commodity prices have fallen, our major resources companies have increased production, which should offset some of the falls in prices.

So far this year, we’ve had three official cuts in interest rates (May, June and October) and economists expect more to come. That may reinvigorate our housing and construction sectors, and flow through to consumers, which could prompt us to go out and spend more, helping our retail sector.

With the resources boom moderating, I still expect the sector to continue to export record volumes of bulk commodities. With other sectors looking more likely to recover, we could see the situation where most sectors of the economy are firing on all cylinders at the same time.

The Foolish bottom line

All we need now is for the Australian dollar to fall, to give our exporters an extra boost and our retailers protection from cheaper online offerings, which should then feed through to additional growth in our economy. Given those considerations, we may well be witnessing the start of a new bull market.

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Motley Fool writer/analyst Mike King owns shares in David Jones. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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