Australian stocks could be topping out here

There is plenty of room, given recent volatility and massive market swings, for the ASX200 to fall back toward 6800 or even lower.

The US and Australian stock markets have been in major bear trends all year. The recent impressive rally has everyone’s hopes up. Particularly in the funds management industry where not all clients were happy with performance over the previous year.

Nevertheless, it is not entirely clear the market has ended that bear market routine.

Significant rallies of similar size were seen earlier in the year and still the market went on to make fresh lows. Is that possible here. Yes, of course it is. At a minimum a 200 point decline from current levels would appear to be on the cards. Even if we are resuming an overall bull market again. The nature of contemporary stock markets appears to be predominantly that of volatility, rather than the previous decades of more clearly delineated trends.

The fundamental backdrop remains challenging to say the least. So many forces attempting to sort themselves out one again the other.

Australia has seen significant weakness in construction, a clear rolling over in both the services and manufacturing sectors, and accelerating inflation and rate hikes.

Meanwhile, employment has remained strong. At least appeared to. The Achilles heel of the employment argument, for an economy that is strong, is that it completely ignores the dominant feature of the jobs market at this time. That is, immigration remains in the doldrums and looks unlikely to return to previous levels in any sustainable fashion.

What Covid has primarily taught the world is that staying geographically closer to one’s family, wherever you live, is now of greater importance.

Then there is the decline in our relationship with China. From immigration to investment to student study, we can no longer expect the impetus to be as strong as it was before Covid and loss of relationship status. Foreign students had pushed education to being one of our biggest earners. While recovering, again we should not expect the previous peaks of activity to be seen.

The external environment is fraught with concern. A war in Europe. The most serious on-going energy supply disruption to Europe. Which despite the West’s best efforts cannot be easily solved, and this consumer/business sentiment shock is leading to reduced activity as well. Energy rationing and even black outs are a very real possibility for nations like Germany and the UK in particular.

China has slowed permanently to a more mature economic rate of growth. China is also facing its own version of some form of property crisis akin to the USA in 2007-2009. This particularly impacts the outlook for Australia’s exports of primary materials.

The USA is in serious economic trouble and the situation there is likely to become far worse as wages skyrocket while productivity is in decline.

On both the domestic and external fronts Australia faces considerable on-going challenges over the coming year. The stock market has just enjoyed an incredible run of strength based purely in optimism and the hope that a slowing of Federal Reserve rate hikes would be good for everyone. This has always been an overly simplistic approach, and such economic arguments may begin to unravel quickly in the not too distant future.

This leaves Australian equities badly exposed from both a fundamental and price action perspective.

While a move lower of some 200 points is highly likely in coming weeks, the real concern must be that if the global economy continues to slow as it has, could the equity market actually still be in a bear market?

This would mean new lows in the order of a further 15% to 20%$ decline?