Will the Banking Sector Cause the Stock Market to Crash

Since the collapse of the Silicon Valley bank in the US a few weeks ago, there has been fears of another GFC style collapse across the world, which has put Australian banks in the spotlight once again. It has also caused fear that another stock market crash may occur, which has pushed the All Ordinaries Index lower in recent weeks. So, is our banking industry under threat or is this an opportunity for smart investors?

Why the Australian banking sector is unlikely to collapse

To answer this question, let’s take a look at the data of the big four banks (ANZ, CBA, NAB and WBC) over the last 39 years since 1984, which shows that Australian banks have been very consistent performers. In reviewing their yearly returns, ANZ and WBC have risen 64 per cent of the time, CBA has risen 66 per cent of the time while NAB has risen 59 per cent of the time. If we look at the last 10 years, these figures fall with ANZ, NAB and WBC rising only 50 per cent of the time, while CBA rose 60 per cent of the time.

For decades, the big four banks were always considered a must have in anyone’s portfolio, which was understandable. However, because of the ongoing Royal Commission into banks and the fallout from the GFC, which caused the banks to restructure their business models, the big four all fell in a sustained move over the next five years from 2015 into the COVID low. ANZ fell around 62 per cent, CBA fell around 44 per cent, NAB fell around 65 per cent and WBC fell around 66 per cent and other than CBA the other three are all well below their highs from 2015.

If we look at the yearly returns prior to their highs in 2015, ANZ, CBA and WBC were rising 71 per cent of the time while NAB rose 61 per cent of the time. So, what does this all mean? Given the prudent practices that the banks were forced to put in place following the GFC, investors should be confident that we won’t see another GFC style event now. We also need to be mindful that our banking system is very different to the US, which is why I can only see great upside potential for the banks.

As they gather momentum, I can also see a return to the kind of performance we experienced in the decades prior to 2015. Given this, rather than being fearful, I recommend investors look to the banks as an opportunity, as I believe they will soon start to drive our market higher over the coming years.

What were the best and worst performing sectors last week?

The best performing sectors included Consumer Discretionary up 1.20 per cent followed by Communication Services up 1.04 per cent and Energy up 0.77 per cent. The worst performing sectors included Financials down 1.89 per cent followed by Information Technology down 0.89 per cent and Utilities down 0.86 per cent.

The best performing stocks in the ASX top 100 included Evolution Mining up 14.34 per cent followed by Newcrest Mining up 8.51 per cent and AGL Energy up 8.44 per cent. The worst performing stocks included Block down 20.77 per cent followed by Charter Hall Group down 8.16 per cent and the A2 Milk Company down 7.22 per cent.

What's next for the Australian stock market? 

The All Ordinaries Index has certainly been on a bit of a wild ride over the past seven weeks with the market falling nearly 9 per cent into the low last Monday. In the last 49 trading days, it has closed higher 13 times and only risen above the prior days high on 7 occasions. What we know is that the good times never last and neither do the bad times, so have we seen the last of this current down move?

With the All Ordinaries Index still sitting slightly below the lower end of my target zone for the low, which was between 7,200 and 7,500 points, it is possible that the current down move is over. Given the low last week was on Monday and over the next two trading days the market closed higher before easing off to end the week down just 0.71 per cent, this could be a sign of the market turning.

Last week, I indicated there were two scenarios that could unfold. The first is that the market stops falling and starts to rise again and last week’s trading has not ruled that out. The alternate scenario is that it will continue to fall with the low expected to occur sometime in May between 6,000 and 7,000 points, which is why I continually remind investors to have exit strategies and to use stop losses. Right now, I urge investors to be patient and wait for confirmation of a move and not to make emotional decisions.

For now good luck and good trading.

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 the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.