Mark Lister, 24 April 2019

The NZX 50, the key sharemarket index in New Zealand, hit 10,000 points yesterday and closed above this level for the first time. Is that cause for celebration, nervousness or is it a meaningless number that shouldn’t matter at all?

The honest answer is “all of the above”. In terms of pure fundamentals, 10,000 points is no more relevant than any other number.

Nonetheless, it’s a good excuse to reflect on the state of the market, just like we did when the Dow Jones index hit 20,000 back in 2015, and as we will when the S&P 500 in the US gets to 3,000 (it’s got about 3.3 per cent to go before then, so who knows when that’ll be).

I’m an optimist, so I’m going to err on the side of celebration for our market milestone. However, it also serves as a reminder that the last decade has been nothing short of exceptional for investors.

The NZX 50 index is up more than 300 per cent since the March 2009 lows, when the world was in the depths of the Global Financial Crisis (GFC), and it’s about 130 per cent above the 2007 peak.

It has returned more than 14 per cent per annum over the past ten years. Over the past 25 years, the average annual return from NZ shares has been 9.5 per cent, and if we go back to the mid 1980s (in order to pick up the devastation of the 1987 crash) it’s more like 7.5 per cent per annum.

Either way, we need to acknowledge returns over the last decade have been running well above normal. Consequently, investors should be wary of looking back over recent years and assuming this is what they can expect in the future.

Another important detail to keep in mind is that the NZX 50 accounts not just for share price changes, but also dividend payments.

Remember the earlier comment that the market is 130 per cent higher than the 2007 peak? When we look at share prices alone, it’s 41 per cent. While still significant, this is much less dramatic and doesn’t conjure up the same thoughts about a huge bubble in prices.

By comparison, the S&P 500 is 86 per cent above its 2007 peak, while Auckland median house prices are 77 per cent above those pre-GFC highs.

The sharemarket is simply a trading platform for many of the great companies doing business in our local economy and around the world. The level of the index is driven by the investment returns of these, which largely reflects the health of the underlying businesses as well as their future growth prospects.

In most cases, if the market is going higher it means our biggest companies are in good shape, which is a function of a strong economy. Despite the need for caution, that’s something we should be proud of, and it deserves a small celebration.