Watch out for Healthcare, Energy and Financials

This big news this week was the Federal Budget along with the RBA meeting on interest rates. Both had the potential to affect our market, but so far neither is raising any alarm bells as the All Ordinaries Index has continued to rise.

What went relatively unnoticed was the fact that market volatility continued to ease and is now reaching its lowest levels since October last year. This is quite interesting given that the market rose this week to 6300 points, yet volatility fell, which is similar to October 2018 when the All Ordinaries Index rose to just above 6,300 points after falling around 4 per cent from the August high. It then fell around 14 per cent into a low last December.

So what does that mean for our market? When volatility starts consolidating sideways for a period of time, it increases the likelihood of a change in the direction of the market. Given the market did not pull back as far as I expected in the past month, but instead continued to make new highs, this could be a sign of a short-term change in direction. If the market continues to rise in the short term, then we will see a larger fall in the second half of the year.

As for the Federal budget, Treasurer Josh Frydenberg released his plans to return the Australian economy to a $7.1 billion surplus in the coming year. The Government’s plans for a stronger economy and a focus on achieving a budget surplus, creating more jobs, lowering taxes and continuing to support essential community services is great news for investors, as this should underpin good economic conditions and, in turn, drive share prices higher.

With an election almost upon us, the stakes are very high for the Liberal Party and Australia, and now is not the time to drop the ball. Having a strong economy and avoiding a recession that has been muted recently relies on having stability, lowering our national debt and getting business moving. There is no doubt businesses have had it tough the past decade following the GFC, a budget that supports business growth is very welcome.

The RBA met this week and decided to leave interest rates unchanged at 1.5 per cent despite the expectation that they may be lowered. Consumer spending was above expectations, rising 0.8 per cent in February; so this has taken the pressure off the RBA to lower rates for now; however, a rate cut is still very much on the cards in 2019.

Looking at the sectors, Information Technology and Materials where the top performers this past week up around 2%. Utilities and Energy, on the other hand, were the bottom performers down around 1 per cent.

In the top 100 stocks, Fortescue Metal was again the top performer up over 8%. Tabcorp, BlueScope, IOOF, AMP and Iluka Resources where all up over 4%. Those not so lucky included Northern Star Resources, Newcrest Mining and Scentre Group, which were all down around 3%.

So what do we expect in the market?
Given that market volatility is down, we need to expect changes to unfold, which could mean one of two things. Either the All Ordinaries index will rise up until early May to between 6500 and 6700 points and then fall into a low in May or June.

Alternatively, the current move up will stop over the next week or so and the market will fall away into a low in early May and possibly June with the fall likely to be around 8% in price. Either way, the longer term outlook is bullish for our market. The sectors to watch in the second half of this year are Healthcare, Energy and Financials.

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