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Is a new ASX 200 record high actually a good thing?

Kenneth Hall

The S&P/ASX 200 Index (INDEXASX: XJO) smashed through its record high on Thursday before closing 0.20% higher at 6,864.00 points.

But while investors might be cheering the solid gains, is it really a good thing to see the ASX 200 rocketing higher as we enter 2020?

Why the ASX 200 hit a new record high yesterday

It’s been a slow build for the ASX 200 since it last set a record high back in July 2019. In that case, the Aussie benchmark index exceeded its pre-GFC highs on the back of rebounding commodities prices and strong global equities.

However, 3 recent rate cuts from the Reserve Bank of Australia (RBA) have done a lot for the Aussie share market. This week it was comments from the RBA indicating that it wouldn’t engage in quantitative easing until rates hit 0.25% per annum. 

Investors took that to mean 2 things: that the RBA is likely to cut rates to 0.25% and that there will be significant monetary policy support at that level.

A number of ASX 200 stocks have been hitting record highs this week including CSL Limited (ASX: CSL) and Coles Group Ltd (ASX: COL).

Is a record high really a good thing?

While the ASX 200 hitting a record high is good news for our investment portfolios, there could be a hidden dark side to the story.

The extraordinary low interest rate environment could be setting Aussie equities up for a big fall in the coming years. If there is a market correction and we see slowing earnings in 2020, there aren’t many levers left for the RBA to pull such as in 2008.

However, there’s no reason why the economic growth cycle can’t continue into next year and beyond. Recessions are often preceded by the strongest periods of capital gains, which is why timing the market has historically been a terrible idea.

So, while we celebrate the ASX 200’s recent gains, it’s worth keeping one eye on whether valuations are getting a little too high as we enter 2020.

The post Is a new ASX 200 record high actually a good thing? appeared first on Motley Fool Australia.

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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019