If January is any guide, five years of 20 per cent-plus returns on the Australian share market are over, and the China boom is not strong enough to soothe the fears in global share markets.
In 12 days of losses, the Australian share market has fallen 22 per cent since its peak on November 1 last year. Last year's gains have been erased and a prolonged bear market may be nigh.
The market rout, sparked by US sub-prime losses and a rejection of George W. Bush's package to restore market confidence, shows signs of spreading to global bond insurers such as Ambac and MBIA, which underpin company debt raisings. That could be catastrophic for confidence.
The market losses have wiped out financial-year-to-date returns for super fund members while for several super funds, gains for the whole of 2007 and part of 2006 have gone too. Expect this financial year's returns for your super fund to be negative.
Meanwhile, someone who contributed $1 million to super leading up to June 30 last year would be down nearly $200,000. Expect serious recriminations on the wisdom of this strategy.
It's generally understood a negative return will occur once every six or seven years as part of a normal market cycle, so perhaps after five boom years it's time.
Educated investors and the younger crowd will shrug and bear it, but the angriest investors are likely to be those who sold property and business assets to contribute to super as part of ex-treasurer Peter Costello's $1 million June 30 contribution special.
"Following yesterday's falls, investors who placed the million dollars in the share market via their super fund would have about $810,830 now. This is greater than a 18 per cent loss in just over six months," notes Adrian Raftery, chartered accountant and chief executive of AccountantsRus.
Perhaps they would still be ahead had they kept their investment properties in quality locations where prices are rising.
To add insult to injury, the share market fall may result in many investors facing the prospect of having to take a smaller monthly pension, Raftery says.
It will be worse for any super fund investors who borrowed to invest in super, he says. "With rising interest rates, there would be a lot of people wishing they had done nothing at all."
The super contribution special was of course tax-driven. It allowed wealthy baby-boomers to get large amounts of money into super so they could withdraw it, and any earnings, tax-free from age 60. Governments can engineer tax-driven handouts for favoured groups, but they can't control the direction of global share markets. As the old saying goes, there's no such thing as a free lunch.
Tax breaks in super are often trotted out as a good reason to contribute, Raftery says, but "the tax breaks are somewhat diminished when on the first $30,000 per annum you earn outside super you pay no more than 15 per cent tax anyway".
Is there anything that might prompt the market to bounce back?
Chief equities economist Craig James says the selling frenzy needs a "circuit breaker", such as an inter-meeting interest rate cut by the US Federal Reserve.
The US Fed is already expected to cut rates by 50 basis points on January 29 but earlier moves may be appreciated.
The role of a rate cut is to stimulate consumer spending and lending activity by reducing the cost of borrowing, eventually nursing markets back to health.
"The global share market slide has its genesis in US recession fears and it is up to the US authorities to take action," James says.
Others say a consumption driven kickstart to the economy will not be enough to restore confidence.
Meanwhile, valuations on the Australian share market have fallen to the cheapest levels in almost 17 years. Those with spare cash may already have started making purchases of discounted quality stocks. Others will prefer to hoard cash to see which way the wind blows in the next three to six months.
Rory Robertson, Macquarie Bank interest rate strategist, said: "We need a sudden favourable shock for a temporary bounceback in the market."
Like CommSec's James, he likes the idea of an inter-meeting US Fed rate cut. Or else, he says a bounceback could be sparked by global investors retreating from profitable short selling positions (where they have bet that certain stocks would fall in value), or he says the US Fed could announce a larger rate cut than is expected.
"Longer-term, I am not expecting a fast recovery anytime soon. While the downturn started in the US, it was accelerated in Asia and Europe when the US market was closed.
"After major booms in asset prices and sudden changes in sentiment - and where over-gearing has characterised the boom - these things tend to long and drawn out."
Robertson points to the tech stock-inspired downturn that started in the US in mid-2000 and ran for about three years. That bear market in the early 2000s saw the S&P 500 halve in value.
Now, fast forward to 2008 and the US share market, which has seen a doubling in asset prices over the last five years, is now down 20 per cent.
"As everyone's grandmother used to say, don't put all your eggs in one basket. A bad showing in one asset class will not necessarily be followed in another," he says.
Adnan Kucukalic, equities strategist at Credit Suisse, is far more upbeat about what he calls "just a cyclical market correction" not a bear market. A few months ago his economic models were flashing red about rising inflation and an over-valued equities market. Not any more.
"I am more optimistic than today I was three months ago," he says.
"I really think the worst of the market correction in Australia is behind us.
"This is because investor risk appetite has basically hit panic stage, so it does not get worse than that. Also, our share market is starting to look more under-valued than over-valued."
That said, Kucukalic is not expecting a bounceback anytime soon. He says a slowdown in the world economy has now begun in earnest. This will be followed by a series of interest rate reductions in the US and probably Europe which will filter through to the economy, until risk appetite and the willingness to lend returns.
Michael Knox, chief economist ABN AMRO Morgans, says the market will only bounce back when the fear of recession is taken away. He believes the market has further to fall.
"This correction has been happening not just because of US sub-prime loans going wrong but because the operating earnings of US companies has been falling. I think US company earnings will fall 5 per cent this year while Australian company earnings will rise 10 per cent," he says.
"I expect the Australian market will start to reflect that in the second half of this year."
For investors with short time horizons, he says Australian stocks are now showing good value.
Global fund managers are already talking about 2008 as being a year of capital preservation when cash may be king.
They point to a jump in the US jobless rate, which signalled that the longest expansion in consumer spending on record will end in the first quarter. And that the number of Americans who fell behind on mortgage payments is at a 20-year high while home prices fell last year for the first time since the Great Depression.
Still, in Australia, inflation is likely to remain "uncomfortably high" as the economy enters its 17th year of expansion. Our cash rate is at an 11-year high, but inflation is still above the Reserve Bank of Australia's target. Imminent inflation numbers are likely to add support to the idea that another interest rate rise is needed. That is, one extra to the RBA increase in November and the one already announced by financial institutions this month, independently of the RBA.
Steven Milch, head of economic research at St George Bank, says "a bounceback will only come when US banks come clean about the extent of their losses".
He says the positive side is that Australia is absorbing the global crisis from a position of strength. The economy is strong, while the housing market is on an upswing.
"Given global uncertainties, the RBA would be wise to not raise rates in February," he says.
