Enjoy the sunshine before the inevitable fall

Banks - can we really bank on a return in the years to come?

After a period of reckoning for the big 4 banks, they have rallied with strong gains since the start of February, with Westpac being the top performer rising around 13%, followed by ANZ by around 11% and then CBA and NAB at around 8%.

The real question that remains is whether this is the start of a longer-term move up or has the market jumped the gun trying to grab a perceived bargain? We knew prior to the final report being released by the Royal Commission that the worst was well and truly out there, and that the market had already factored this in the stock price.

Speculators have definitely come into the market believing that the banks are 'cheap' given they have fallen over nearly 4 years and lost 30 to 40% from their previous highs. And while there were 'no surprises' in the final report, it is possible that this may have been the catalyst for the move up in recent weeks.

That said, it’s important to be aware of the bigger picture, particularly given that in the last quarter of 2018 the Australian economy only grew by 0.2% and GDP went backwards for the second straight quarter, which is the first time since 2006 that the Australian economy has moved backwards.

Tighter lending requirements, as a result of the Royal Commission, and a slowing economy means that the RBA will most likely drop interest rates to stimulate growth. Taking this into account, together with a potential change in Government and an already declining property market makes for some interesting and challenging times ahead for the banks.

It’s no secret that the banks make most of their profits from lending, which means they may struggle to grow if people are not willing to borrow to pay top dollar for property. And with ASIC set to bring civil and criminal charges, this short term move up could be over quite quickly.

So is now the time to be buying the banks? In my opinion, it is good to make hay while the sun shines, but it is more important to not fall in love with the banks and be prepared to sell if they start to fall away again.

The best sectors this week were Consumer Staples up 3.4% followed by Communication Services at 1.8%. Of the top 100 stocks, FMG rose by over 10 per cent, Whitehaven 8 per cent and JB HiFi was up 6 percent. While Northern Star and Evolution were both down by around 5%.

So what do we expect in the market?
Right now the Australian market is really defying logic, as it is up nearly 16% since the low in December, and is showing no signs of slowing. That said, there is heavy resistance at around 6500 points.

While our market has risen 16 per cent in recent months, this is quite uncommon; therefore, as I alluded to above, right now is the time to enjoy the sunshine before the inevitable fall. Given this, don’t be surprised to see the market find resistance and start to fall away to around 6000 points in the near future.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au