I am often asked to give an opinion about what the share market will do next. Generally, the answer I give depends on the activity of the day or the day before.
At the moment, those circumstances are of course underpinned by COVID-19 but there are other events that affect the market on a daily basis.
For example, anarchy in the USA, the 2020 US Presidential Election (also contributing to the anarchy in the USA), global trade tensions with China and the activities of Central Banks and Governments as they attempt to stimulate economies using Monetary Policy and Benefit Payments.
Maybe we need to look back at the market volatility to see what has happened to the ASX200 index and the S&P 500 Index since the 1st January 2020. This will give us an idea of where we have been.
At the start of 2020, the ASX 200 was happily travelling along at 6684 points. By February 20, it had grown to its highest point ever at 7197 points.
Enter COVID. The ASX200 dropped a staggering 39 per cent to its low point on March 23, but has since recovered to the most recent high of 6148 points on June 10, representing an increase of 39.65 per cent.
At current levels, the ASX200 will need to increase by another 17.7 per cent for it to get back to the highs of February 20.
In the US, the S&P 500 started 2020 at 3230 points, topping out at 3386 points on February 19. It went on to lose nearly 34 per cent, also hitting its low on March 23.
It has since made a remarkable recovery, surging nearly 55 per cent to its current position of 3508 points and recording an overall increase of nearly 8 per cent since the beginning of the 2020 calendar year.
The increases in both the ASX200 and S&P 500 seem to defy commonsense when we are told that the economic effect of COVID 19 has been a deep, worldwide recession that may take years to recover from.
It is interesting to look further at what has happened to the US Share Market, as represented by the S&P 500 Index.
A closer examination reveals that a large portion of the apparent recovery has been due to just 5 of the 500 index components – the usual tech stock suspects: Apple, Amazon, Facebook, Microsoft and Google.
The other 495 components have actually had a Year To Date (YTD) loss, but the Index has scraped out a reasonable overall gain despite this.
In Australia, the story is somewhat different.
The recovery in share prices has been broader and the gains in the Top 20 belong to Iron Ore Giants (BHP & RIO) a gold producer (Newcrest), large consumer staple retailers (Wesfarmers, Woolworths and Coles did well) and CSL, which is in the race to help deliver a COVID-19 vaccine.
Macquarie Group, Aristocrat and Goodman Group round out the winners for the 2020 year.
Property, financials, insurance, utilities and telcos have all contributed heavily to the decline in the ASX 200.
More recently, Australian tech companies (outside the top 20) like Afterpay and Wisetech have had a good run.
So can the market improvement be sustained?
Somewhat simplistically (as that is the way I tend to operate), my take on all of this is that the market will continue to display some resilience, provided Central Banks keep interest rates to an all-time low and governments continue to pump money into the economy with social security benefit payments (Job Keeper, for example).
Even a humble financial adviser such as myself understands that if you are discounting a company’s cash flow at an interest rate close to 0 per cent, the valuation of the company in forward terms is likely to be very high.
If a vaccine to COVID-19 is discovered soon, successfully provided to the world’s population and the virus is controlled, the world’s economy will get back on track fairly quickly.
It would then seem that the share market has currently priced this recovery into share prices. If low-interest rates are also sustained, then this prophecy is likely to be true.
Conversely, if the vaccine takes a long time to be discovered and provided to the world’s population, the economic disruption caused by the pandemic will continue to drive the global recession deeper.
If we go over a proverbial financial cliff because stimulus measures continue to run out of steam, we will also see more economic pain than we have already seen.
So, predicting what the share market does next still seems like a crystal ball exercise to me.
No one can accurately predict when the pandemic will end, so the upside and downside to the share market is largely unknown – at least for the short term.
My view is that the market appears well overpriced, particularly if a vaccine is not discovered and successfully distributed quickly.
Sudden drops in stock valuations could still occur in the near future, such that we may see a W shaped share market recovery longer term and not the U shaped recovery we are currently seeing.
Whatever your strategy for long term investing may be, I would suggest you stick with it.
Many mistakes are made by cashing out shareholdings when the market falls. Being able to time re-entry into the market never works and you can incur a lot of unnecessary costs by using this strategy.
If your portfolio is tilted towards equities, stay there. There is still plenty of potential upside from your current holdings, even if you experience painful portfolio declines in the short term.
If your position is more defensive, you will preserve your capital in any future downturn and then be placed to take advantage of depressed share prices when the market recovers.
Above all else, stay safe and happy investing.
Tony Simmons leads the Private Wealth team for BDO in South Australia. He has more than 30 years’ experience supporting business and personal clients to protect and grow their wealth and is a frequent contributor to specialist publications.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product.
Past performance is not a reliable guide to future returns.
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