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Here’s why the ASX 200 has flipped today

Sebastian Bowen
Man asking financial questions

The S&P/ASX 200 (INDEXASX: XJO) has shed some of the bullish sentiment of yesterday and is down 0.63% at the time of writing to 7,088 points.

It’s been a wild month so far for the ASX 200, which first broke the psychologically-important 7,000 points mark for the first time ever last week and crossed the 7,100 threshold yesterday.

Even though we’re only 3 weeks into the new year, the Aussie share market has already banked a near-6% gain since New Year’s Day. That’s more than half of its long-term average annual return of around 7–10%.

What’s caused this massive bull market?

Bullish sentiment around all ASX shares large or small has helped propel the index to these unprecedented levels. Blue-chips like Woolworths Group Ltd (ASX: WOW), Telstra Corporation Ltd (ASX: TLS) and CSL Limited (ASX: CSL) have all booked massive gains since the start of the year, with WOW and CSL shares currently trading at all-time highs.

Even the ASX banks like Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) have been shrugging off their recent woes and are piling onto the momentum. Interestingly, CBA shares are at a 3-year high at current levels.

Has the share market gone crazy?

Reporting in the Australian Financial Review (AFR) suggests that the falls we are seeing today stem from the new jobs numbers out this morning that indicated our national unemployment figures now stand at 5.1% – a drop of 0.1%.

That’s right, the markets are falling on good economic news. Specifically, that interest rates might not be cut when the Reserve Bank of Australia (RBA) meets next month. Interest rates are traditionally lowered to provide economic stimulus, and because the economy seems to be building steam, the market is figuring that the RBA might want to keep its powder dry.

I think today’s moves are emblematic of the issues that investors face in today’s brave new world. A share market built on low interest rates is a house of cards, in my view. The only thing that really influences long-term share price appreciation is fundamental earnings growth and until we see that, I wouldn’t get too excited about what interest rates are doing.

Foolish takeaway

The famous investor Benjamin Graham once said (and I’m paraphrasing here) that ‘the stock market is a voting machine in the short-term and a weighing machine in the long-term’. Investors are clearly voting for more interest rate cuts, but it’s my worry that these won’t weigh very much when the scales are inevitably pulled out. That’s why I’m investing with caution at these levels and would recommend a similar attitude!

The post Here’s why the ASX 200 has flipped today appeared first on Motley Fool Australia.

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Sebastian Bowen owns shares of Telstra 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 Telstra 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.

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. 2020