Why Shares Are Going Up If Economy Is In Trouble?
Why Shares Are Going Up If Economy Is In Trouble?
A lot of clients have been asking me, why the market and shares keep going up after covid-crash in March, even though economy in all countries is not in good shape and is likely to be in recession.
Is the stock market recovery going to continue or is it likely we’ll experience another shock?
I will try to answer those questions for you, so you can feel more comfortable making your investment decisions for your superannuation fund, your pension fund if you have already retired, or any other form of the investment you might be holding.
Let’s review first, what has happened since March 2020 when the market hit rock bottom, super funds and pension funds drop in value dramatically:
– US dropped by -34% and now up +52% and is already above the pre-March highs.
– Europe dropped by -38% and now recovered by +37% but still 15% below the pick before March drops
– Australia dropped by -37% and recovered by +35% with another -15% to go before it reaches pre covid high.
Most people see the rebound as strange, illogical, and irrational. After all the economy around the world is still crippled by covid epidemic.
To understand current situation and what we can expect from the market going forward, first let’s check all negatives and positives of current state of our economy.
1. Coronavirus is not over yet, and is not under control, especially in third-world countries. Many developed countries experience the second wave – just like Australia – which can force further lockdowns and impact on economy and delayed recovery.
2. Coronavirus created a big hit to economic activity and profits, with US earnings falling by 32% in comparison to 2019-20. In Australia, the fall is expected to be 22%, the biggest fall since 1990 recession and 56% of Aussie companies have cut down their dividends.
3. We can see a rise in unemployment across the world. Many companies might decide to cut down their operational costs and either keep staff working from home or reduce number of employees to keep cost down.
4. Some industries experience a very slow recovery – such as travel industry.
5. Shares have stagnated for the last couple of months, but please remember that historically August and September tend to be some of the weakest months during the year for share performance.
6. US election can potentially increase market volatility with outcome uncertainty.
So yes, quite a bit of bad news, however, there is more of the good news ahead of us, so let’s review that good news as well.
1. Referring to the second wave in developed countries, the good news is that it is less severe, better dealt with, there is more testing done with better protection. For those reasons most countries avoided the full lock-down (with sad news for Victoria in Australia)
2. There is a recorded decline in new cases in US and other countries,
3. Increased spending activities and credit card activities is a good indicator of consumer confidence returning – with many on-line transactions -internet business is booming now.
4. There is some progress in vaccines and treatments for coronavirus with many human trials in progress.
5. Fast introduction of fiscal policies, government financial assistance helped to keep unemployment relatively low.
6. Low-interest rates – it is a positive environment for employment and re-opening of business activities.
7. US dollar falling in price
8. Rising commodity prices – sign of global recovery
9. The very low interest rates and bond yields have increased “attractiveness of shares, despite lower earnings and dividends, because the cash or bond alternative is even less attractive.
So here you have it, negatives, and positives.
So what is the verdict?
Based on the data and updates I receive from different fund managers and economists, the believe is that although there is some bad news still in the world and most certainly the covid problem has not been resolved, there is actually more good news on the horizon.
We could experience again a short-term share pullback due to lack of certainly around coronavirus, US election and unresolved tension between US/China. But the expectation is that share returns and performance should be positive for the period of 12 months.
Australian market has underperformed the US equity market, and it only make sense to keep investing into Aussie shares, that is relatively cheaper to US market.
US market performance has been incredibly led by IT and health sector, with many other industries, such as financials or materials hit hard by coronavirus outbreak.
So, to sum up – news are not as bad for the market as one might think. You need to be selective and cautious, however considering that Aussie market underperformed the US market, and really there is no alternative in cash-bond related investments, the general feeling is that Aussie market might be a good place for your investments going forward, as long as you are looking for growth assets and some income. And don’t forget those franking credits that can improve your overall return, especially if you have money in your super, pension or even directly on your name and your MTR is low – which is the case for most retirees.
To help you become a better investor, I have written a short book “12 Principles of Investing”, so feel free to download your copy and get even more benefit out of your investing.
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