Equity Markets following the Cycle of Market Emotions

There has been the long awaited “bounce” after the 2 year lag As at the end of August, the Australian S&P/ASX300 Accumulation Index has bounced over 40% since the March 2009 low of Despondency and Depression (The bottom of the Cycle).

At the low, valuations were attractive to allow the savvy investors to take advantage of the carnage.

As the rally progresses, we seem to be in the “Cycle of Hope” . It is these “late” joiners, rather than cheap valuations, that will keep the rally going.

So, does this mean that it is too late to join the party?

History shows that after the lift-off phase (from Depression to Hope to Relief , good returns can still be had – we need to go through the Cycle of “Optimism” “Excitement” “Thrill” and “Euphoria”

Assuming it takes four years to reach our previous high from current levels, Australian shares could return around 15% to 16% pa. However, if it takes six years to reach previous highs from current levels, returns are more likely to be around 7.5% to 8.5% pa – still good returns!!

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