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What would it take for the ASX 200 to hit 7,000 again?

asx 200 start represented by man kicking miniature man through the air
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Today, the S&P/ASX 200 Index (ASX: XJO) has reached a new post-March high of 6,562 points. That’s 6% higher than where the index was a month ago, 17.6% higher than where it was 6 months ago and 44% higher than the low point we saw on 23 March during the coronavirus-induced market crash. However, it’s also 2% below the level the ASX 200 started 2020 at, and 8.5% below the all-time high of 7,162 points it reached in February.

Yes, the ASX 200 has only crossed 7,000 points at one period in its entire history, and that was for a period of fewer than 2 months at the start of this year.

So what would it take for the ASX 200 to go back over 7,000 points?  One might think, due to the effects and maladies from the coronavirus pandemic, that reaching a pre-pandemic stock market high is unfeasible in the current climate.

However, that view could be rendered moot by looking at the United States markets right now. The Dow Jones Industrial Average Index (DJX: .DJI) (one of the benchmark indexes for the US markets) has just made a new high. Not a 2-month or a 6-month high, but an all-time high. On Monday this week, the Dow closed at 29,950 points, a level it has never closed at or above in history, including the ‘golden’, pre-COVID months of January and February this year.

Why the markets are surging to new highs might be a question for another time, but let’s see what would need to happen for the ASX 200 to follow the Dow and make new highs of its own.

How do banks fit into the ASX 200?

The ASX 200 is a market capitalisation-weighted index. This means that the largest companies (by market cap) within the index have the most influence on the index. To illustrate, the ASX 200’s largest holding is CSL Limited (ASX: CSL) with a 7.78% weighting. The smallest constituent is Western Areas Ltd (ASX: WSA) with a 0.03% weighting. That means if CSL goes up 2% on any day, it’s going to have more of an impact on the ASX 200 than if Western Areas goes up 200%.

Together, the top 10 shares in the ASX 200 make up roughly 43% of the total weighting. Of those top 10, 5 are banks: Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and Macquarie Group Ltd (ASX: MQG).

Together, these ASX bank shares have a collective weighting of 21.4% in the ASX 200. Why is this important? Well, because all 5 of these companies (we might make an exception to Macquarie here), operate in the same industry, in the same market and under the same conditions. The big four especially have an oligopolistic hold on the Australian retail banking market. That, in turn, means the factors that affect one bank’s share price are likely to affect them all.

For the ASX 200 to reach 7,000 points, it’s likely that the ASX banking sector will need to carry the load, as it were. Remember, last time the ASX 200 was over 7,000 points, the big four were trading with valuations far above what we see today.

Foolish takeaway

Looking at the numbers, a logical conclusion could draw us to this scenario: the only way the ASX 200 is going to go back over 7,000 points is if the ASX banks appreciate considerably, or else the rest of the ASX 200 has an exceptional growth period and picks up the slack.

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Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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.

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