Should you worry about market rallying so fast?

We worry when the market drops heavily, but we also worry when it rises fast, as it might start dropping again at any time. And this is exactly what I see now, some people worry that it has been too much of the fast ride of stocks recovery, so the sentiment may change at any time, and others worry that they have missed out again, by not investing early enough. You got to love investing environment. So, let’s talk should we worry and run away, or should we keep on investing?

The month of March will be forever known as the CoronaVirus crash with markets around the world dropping dramatically, and Australian market reducing its value by over 30%.

In recent weeks, however, we have seen an impressive rebound of almost halfway up of market value before the CoronaVirus crash, we still have a very long way to go, but the rebound is very impressive none the less.

Don’t forget that if the market drops by 30% in order to get back to the original, pre-fall value, it needs to recover by 60%. Hence the recovery is usually longer than the drops.

When it comes to investing, investors are divided into two groups:

• The bulls who believe that the coronavirus epidemic is running its term and that the worse is over, hence optimistically returning to the market and buying stocks pushing the prices higher and higher
• The bears that believe we are not out of the coronavirus problem yet, there is lots of uncertainty, we could have the second wave, and some are far too optimistic for their own good.

So where are we now? What can we expect from the market going forward? Who is right and who is not? Let’s see if we can find some clarity to those questions.

Also, please refer to the previous article: The Lucky Country – 3 reasons why Australia will emerge better than most, as this post only confirms information previously provided with the new data.

This article is not a recommendation in any way, but rather a general information of the state of our market and why a specific behaviour is likely to occur in order for you to decide who is right – bulls or bears and what to expect next.

Based on statistical information: Australia has controlled the spread better than most countries and the curve is well under control. The Australian government introduced one of the best stimulus packages to keep our economy afloat. Our economy is opening up, we see easing lock-downs around the world, China – our biggest trading partner is working back at 90% capacity – unfortunately, you can already see the negative effect it has on the quality of air and rising pollution over there.

The market has already included all the earning downgrades of companies listed on the stock exchange; therefore, it no longer has an impact on share pricing. Remember than the market is always forward-looking, often 12 months ahead, therefore all the corporate bad news, has already been included in the pricing of stocks.

Those are the reasons why so many big fund managers, super funds and big investors are returning and buying Australian stocks with many starting to have an overweight position in Aussie equities.

One could argue that this is an overly optimistic behaviour, as the second wave may hit any country any time. We don’t know if that happens and we don’t know how each country would react to this. Obviously, that would impact the market immediately, but if the first wave was so short-lived, the second should not be any worse from the economy and market behaviour perspective.

Each country might react at that point differently with some such as very likely Australia – going back to lock-down again, but others like the US or surprisingly Sweden who had close to no restrictions will most likely keep their economy going.

For now, Australia is back to its export of our resources such as iron-ore, gas and coal. But over the last few months, Australia has had an incredible amount of rain, which appears to be finishing the drought of the last 10 years and Australian agriculture is expected to have a great come back. We have already seen prices of fruits and veggies dropping to levels from many years ago.

So, to sum up, markets are volatile, but with a bit of extra knowledge and research, investors are able to take actions with risk reduction by understanding what has been happening, why it has been happening and what tomorrow might bring.

From what I hear from different fund managers and what they are buying, Aussie Market is not a bad place to return to and start re-investing. Providing, of course, you do your due diligence, your research and all precautionary measures such as correct asset diversification that is within your risk investment profile. As this update is of general nature only, for more information or how this information applies to you, contact me directly for a chat.

by:  Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement