The ASX could soon break its all-time high despite economic warning signals

The impressive ASX impressive but remains in a precarious position
  • The Australian sharemarket is trading at almost unprecedented levels, with the ASX 200 Index just 77 points short of its previous high and the All-Ords just 23 points lower.
  • Set just before the global financial crisis (GFC) struck, it’s taken more than a decade for the local sharemarket to return to within striking distance of its previous records.
  • That’s despite lead indicators showing that the Australian economy is facing serious challenges. As the Reserve Bank of Australia (RBA) desperately tries to stimulate the economy, how long the ASX can keep driving higher remains unclear.

The Australian Securities Exchange (ASX) looks to be within a whisker of its record high.

Before the session open on Monday, the index of its top 200 companies sat at 6,751 points — just 77 points shy of its 6,828 peak.

Meanwhile, the All-Ordinaries Index — made up of the country’s largest 500 companies — was trading just 23 points lower than its all-time high.

Both were marked on 1 November 2007 just before the global financial crisis (GFC) sent stock markets around the world tumbling.

Indeed, it’s taken the Australian market more than a decade to return to those levels.

The ASX 200 Index over the last decade (Chart: MarketIndex)

Contrast that with the US market, which eclipsed its pre-GFC peaks years ago.

The S&P 500 Index, made up of the largest 500 listed companies in the US and generally considered the best indicator of the US stock market’s health, is trading at almost twice its 2007 levels for example.

How the S&P500 Index has fared (Chart: MarketWatch)

The reasons for this are many, according to AMP Capital Chief Economist Shane Oliver, including the tendency of the US Federal Reserve to run more expansionary monetary policy than the Reserve Bank of Australia (RBA).

Oliver also points to the proclivity of Australian companies to pay out dividends — a factor that isn’t included in the Index.

Interestingly, it comes as growth in the underlying Australian economy approaches GFC levels.

The Reserve Bank of Australia (RBA) has slashed the official cash rate to a record low of 1% in an effort to encourage spending and stimulate the economy, with many economists forecasting another cut later this year.

Meanwhile, the embattled retail sector continues to struggle on, business confidence remains weak, as consumers spend less and less.

As the ASX looks to drive higher in coming weeks, an ailing economy means the low-fuel light might well be on.

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