WARNING!

There’s a market strategist that appears in the AFR from time to time. I’ve never met him. That said, whenever he pops up in the press, I listen. He’s usually bringing a handy insight or two.

Today, he’s warning that the ASX could drop 20% from – for him – a toxic mixture of high valuations, complacency and weak earnings from the big ASX firms.

Sounds scary. But then, perhaps somewhat oddly, he expects the market to rally back up by the end of the year to 8000 points. It’s about 8400 now. So, not so scary?

The catalyst for the rebound would be the RBA cutting rates to offset the economic contraction (in his scenario).

Hmm. There’s a lot to unpack there. I’m not sure I go with him on this. Yes, earnings may be weak in Australia.

But maybe it’s not as bad as feared. Perhaps they even surprise. Or perhaps the market is more forgiving as it begins to “look through” this weak patch to better days in 2026 or 2027.

The reality is we don’t know, and neither does our market strategist. He’s tabled a scenario.

Maybe it comes to pass. Maybe it doesn’t. Let me offer a better idea…

The best thing to do, or at least what I’m going to do, is bypass gambling on what the market does, or does not.

Much better, at least in my experience, is to back companies that are building out their future.

Case in point is gold development companies. You can sit around trying to guess what the gold price is going to do week by week, month by month, even year by year.

Good luck doing that consistently.

Or you could work out which companies have credible management, and are exploring, building mines, mining and growing their reserves and resources.

In other words, creating value!

See the difference? Trying to call the market doesn’t involve any direct real world productive behaviour.

It’s trying to guess how investors respond to thousands of different inputs and expectations that are constantly changing.

Look at Trump. In April he terrified everyone with his tariffs. Now there’s a meme for him. It’s “TACO” – Trump Always Chickens Out.

We saw it again after Europe was going to get 50% tariffs, but then the deadline went back. Blah blah. On we go from the endless stream of babble about everything and nothing.

Let me give you another example. One of my recommendations is a company called MA Financial ($MAF).

Over the recent years, management there set up a “non bank” lending division to enter the mortgage market.

This came at a short term cost to earnings in 2023 and 2024 because it required investment.

And, don’t forget, management had to get off their arse, recruit people, motivate them, put the business plan in place, plus get the directors and investors on board.

Then raise the money to fund the whole shebang.

No small thing.

Think about this

Now, as it happens, the outlook for mortgage lending is now going up as house prices respond to demand and lower rates.

Also, some pressures specific to non banks are also coming off. In other words, they might be entering a bit of a sweet spot. MAF should do pretty well, all things considered.

Certainly, I’m happy to back MAF come what may here. They also just announced a major acquisition for a $2 billion property manager.

The next 6 months will play out in some way or another. But in three years MAF will still own that $2 billion in real estate…and their lending division.

The market moves of 2025 will be forgotten.

Point being…

I’d urge you to focus on companies creating value, and let the market do what it’s going to do.

Best wishes,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

Murray’s Chart of the Day –
Bond Yields vs Stocks

By Murray Dawes, Thursday, 29 May 2025

The chart above is a bird’s eye view of the relationship between bond yields and stocks.

The black line shows the yield on the German, Japanese and US 30-year bonds added together.

The blue line is the S&P 500 with an inverted scale (the chart is upside down).

For decades we have been in a falling interest rate environment which has been great for asset values.

A stocks price can be seen as the net present value of all future expected earnings discounted by the risk free rate plus a risk premium.

So as the risk free rate falls, the net present value of future earnings goes up.

That is shown in the chart above with the black line trending down and the blue line tracking it (remember that is the S&P 500 upside down, so when it falls it means the S&P 500 is rising).

But look at what has happened since 2022.

The long term downtrend in yields has sharply reversed and has shot higher rapidly.

The stock market stuck to the script initially and sold off up until April 2022, but since then has rallied along with the rising yields!

So it looks like falling yields are good for stock prices and rising yields are also good for stock prices.

What may be happening as pointed out by Greg Canavan recently, is that money that has been coming out of government bond markets as rates rose could be finding their way into safe stocks such as the magnificent 7 or even Commonwealth Bank of Australia [ASX:CBA].

If that is the case we could be witnessing a large blow off rally as a result of those large capital flows. If government bond yields continue to march higher and especially if they jump sharply like we saw in Japan recently, there will come a point when stocks can’t ignore it.

That moment may not be imminent and the flows out of government debt and into safe stocks could continue to stoke stocks higher for now.

But if the sell off in bonds becomes disorderly get ready for another correction in stocks.

Regards,

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps