Market Gunna Do What Mr Market Wanna Do | Bonds & Fixed Income

WARNING!

There’s a market strategist that seems within the AFR from time to time. I’ve by no means met him. That mentioned, every time he pops up within the press, I hear. He’s often bringing a useful insight or two.

Today, he’s warning that the ASX might drop 20% from – for him – a poisonous combination of high valuations, complacency and weak earnings from the large ASX companies.

Sounds scary. But then, maybe considerably oddly, he expects the market to rally back up by the top of the 12 months to 8000 factors. It’s about 8400 now. So, not so scary?

The catalyst for the rebound could be the RBA chopping charges to offset the financial contraction (in his state of affairs).

Hmm. There’s a lot to unpack there. I’m not sure I’m going with him on this. Yes, earnings could also be weak in Australia.

But perhaps it’s not as dangerous as feared. Perhaps they even shock. Or maybe the market is more forgiving because it begins to “look through” this weak patch to higher days in 2026 or 2027.

The actuality is we don’t know, and neither does our market strategist. He’s tabled a state of affairs.

Maybe it involves cross. Maybe it doesn’t. Let me offer a higher concept…

The best factor to do, or at the least what I’m going to do, is bypass playing on what the market does, or doesn’t.

Much higher, at the least in my expertise, is to back corporations which might be building out their future.

Case in level is gold development corporations. You can sit round making an attempt to guess what the gold price goes to do week by week, month by month, even 12 months by 12 months.

Good luck doing that constantly.

Or you could possibly work out which corporations have credible management, and are exploring, building mines, mining and growing their reserves and sources.

In different phrases, creating worth!

See the distinction? Trying to call the market doesn’t contain any direct actual world productive behaviour.

It’s making an attempt to guess how buyers reply to hundreds of completely different inputs and expectations which might be consistently altering.

Look at Trump. In April he terrified everybody together with his tariffs. Now there’s a meme for him. It’s “TACO” – Trump Always Chickens Out.

We noticed it again after Europe was going to get 50% tariffs, however then the deadline went back. Blah blah. On we go from the limitless stream of babble about the whole lot and nothing.

Let me provide you with one other instance. One of my suggestions is a company referred to as MA Financial ($MAF).

Over the latest years, management there set up a “non bank” lending division to enter the mortgage market.

This got here at a short time period price to earnings in 2023 and 2024 as a result of it required investment.

And, don’t neglect, management needed to get off their arse, recruit people, inspire them, put the business plan in place, plus get the administrators and buyers on board.

Then raise the money to fund the entire shebang.

No small factor.

Think about this

Now, because it occurs, the outlook for mortgage lending is now going up as home costs reply to demand and decrease charges.

Also, some pressures particular to non banks are additionally coming off. In different phrases, they is perhaps getting into a bit of a candy spot. MAF ought to do fairly properly, all issues thought-about.

Certainly, I’m joyful to back MAF come what might right here. They additionally simply introduced a main acquisition for a $2 billion property supervisor.

The subsequent 6 months will play out indirectly or one other. But in three years MAF will nonetheless own that $2 billion in real estate…and their lending division.

The market strikes of 2025 will probably be forgotten.

Point being…

I’d urge you to concentrate on corporations creating worth, and let the market do what it’s going to do.

Best needs,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

The chart above is a chook’s eye view of the connection between bond yields and stocks.

The black line reveals the yield on the German, Japanese and US 30-year bonds added collectively.

The blue line is the S&P 500 with an inverted scale (the chart is upside down).

For a long time we’ve been in a falling rate of interest setting which has been great for asset values.

A stocks price could be seen as the web current worth of all future anticipated earnings discounted by the risk free price plus a risk premium.

So because the risk free price falls, the web current worth of future earnings goes up.

That is proven within the chart above with the black line trending down and the blue line monitoring it (keep in mind that’s the S&P 500 upside down, so when it falls it means the S&P 500 is rising).

But take a look at what has occurred since 2022.

The long time period downtrend in yields has sharply reversed and has shot larger quickly.

The stock market caught to the script initially and bought off up till April 2022, however since then has rallied together with the rising yields!

So it appears like falling yields are good for stock costs and rising yields are additionally good for stock costs.

What could also be taking place as identified by Greg Canavan just lately, is that money that has been popping out of authorities bond markets as charges rose could possibly be discovering their method into secure stocks such because the magnificent 7 and even Commonwealth Bank of Australia [ASX:CBA].

If that’s the case we could possibly be witnessing a massive blow off rally as a end result of these massive capital flows. If authorities bond yields proceed to march larger and particularly in the event that they leap sharply like we noticed in Japan just lately, there’ll come a level when stocks can’t ignore it.

That second is probably not imminent and the flows out of authorities debt and into secure stocks might proceed to stoke stocks larger for now.

But if the unload in bonds turns into disorderly prepare for one more correction in stocks.

Regards,

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps