More pain ahead: What’s next for Australia’s stock market

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What a week it’s been in global equity markets, with many indices down sharply. If you’ve read the news, it looks like investors are driving the market down because they’re worried about a global recession.

But I’d like to know who these investors are, given that the majority of people I talk to are more worried about rising energy costs than a global recession, and they certainly aren’t selling their holdings.

I’m often asked what makes a stock or the market go up or down, as if the answer to the question would somehow provide a crystal ball as to what to do next, when in fact the answer will mean very little for the vast majority of individual investors.

The economic factors surrounding what drives a market up or down are very complex and they don’t change as quickly. Given this, it is important not to put labels on events, for example, saying that investors drive the market down, as this implies that mom and dad investors somehow magically move the market.

In reality, it’s the big end of town like hedge funds and other big institutions that are using the current high inflation environment to move the market. The US Federal Reserve has clearly stated that the high level of inflation is only temporary and is driven by two main factors.

The first is due to pent-up demand from COVID and, second, rising energy costs due to the Russian invasion of Ukraine. The former will be resolved in the not-too-distant future, while the latter is expected to slowly fade away.

As I said before, I continue to have problems with large institutions taking advantage of the market at the expense of retail investors, especially with pension funds lending stocks so that short sellers can drive the market down as they do now.

The best and worst performing sectors this week

The best performing sectors were Communication Services down more than 1%, followed by Consumer Staples down more than 3% and Utilities down more than 4%. The worst performing sectors include information technology, down more than 7%. Next come energy, down more than 6%, and industries down more than 5%.

The best performing stocks in the S&P/ASX top 100 include Lynas Rare Earths, up more than 3%, followed by Computershare, Telstra and Newcrest Mining, all up more than 2%.

Worst performing stocks include Block, down more than 19%, followed by James Hardie down more than 13% and Qantas down more than 12%.

What’s next for the Australian stock market

The Australian stock market continued to fall this week and is currently down just over 5%. This all happened after the market opened on Tuesday after the long weekend.

The market has fallen below the recent May 12 low of 7157 points, indicating that further declines are likely.

That said, I think any dips will be short-lived and likely to last one to three weeks and around 6600 points or slightly below that level. I am also confident that the market will soon find support and turn more bullish heading into Q3 2022.

Investors would be wise not to panic when selling, as it is common for them to exit at or near the bottom of the market rather than preparing for nice buying opportunities once the market stabilizes.

Once again, I urge investors to be patient and cautious, and not pick the cheap or small-cap stocks, but rather buy quality top 50 stocks when the time is right.

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