The Motley Fool

Will the ASX follow the Dow Jones to new all-time highs?

The US major indices are ploughing into new uncharted territory, while the ASX200 is also showing signs of strength. Could the Australian market also follow suit and have a crack at hitting all-time highs?

Global interest rate and growth environment

The US posted a resilient jobs report last Friday with 128,000 jobs added in October. This follows the US Federal Reserve making a quarter-point interest rate cut as insurance against ongoing risks from slowing global growth and the impact of the 16-month US–China trade war. However, the Fed has made it clear that it does not expect to lower borrowing costs further unless the US economic outlook materially deteriorates.

On Tuesday night, the US economy passed a crucial test that saw its ISM Non-Manufacturing Index, a leading indicator of the health of the services sector, beat economist estimates by a substantial margin of 54.7 versus an expected 53.5. While the economy remains vulnerable, the bull case remains intact.

What does this mean for the ASX?

My opinion is that the ASX is in a much more vulnerable position than the US markets.

The ASX200 is dominated by financials, namely the big four banks. As investors might have noticed, they aren’t doing that well. The low interest rate environment has slashed their net interest margins, while the recent property market recovery has yet to bolster profits.  

The Westpac Banking Corp (ASX: WBC) full year result triggered a sharp decline in the banking sector. The company reported a 16% decline in statutory net profit and a 15% decline in cash earnings. This also saw the bank cut its dividend materially and launch a massive $2.5 billion capital raising. This brings into the question whether or not other banks will need to raise capital to maintain the strength of their balance sheet and capital requirements, reduce dividend franking or cut dividends.

In order for the ASX to move forward, it will need the support of the financials sector. If the market witnesses more capital raisings and dividend cuts, then the ASX200 at 7,000 will continue to remain a fantasy. The Westpac capital raising will also bruise the sector, which will take time to recover.

What about other sectors?

Elsewhere, miners such as the BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG) have been strong performers following firm iron ore, copper and other material prices. Likewise, sectors such as healthcare and consumer staples have also been solid performers.

Foolish takeaway

The market is trying to push higher, but I believe that weakness in ASX financials and big four banks will continue to suppress the likelihood of a push to all-time highs.

Top 3 Dividend Shares To Buy For 2020

When Edward Vesely -- our resident dividend expert -- has a stock tip, it can pay to listen. With huge winners like Dicker Data (up 147%) and Collins Food (up 105%) under his belt, Edward is building an enviable following amongst investors that are planning for retirement.

In a brand new report, Edward has just revealed what he believes are the 3 best dividend stocks for income-hungry investors to buy now. All 3 stocks are paying growing fully franked dividends giving you the opportunity to combine capital appreciation with attractive dividend yields.

Best of all, Edward’s “Top 3 Dividend Shares To Buy For 2020” report is totally free to all Motley Fool readers.

Click here now to access this free report.

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!