Posted 04.05.2020 in Industry Updates
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Covid-19 Update 7 | Share Market
During the week a client posed a question that spurred me to get back to writing my updates. "How is it that the share market is recovering just when the economy is getting worse?"
The clear reminder we need to take from the month of April is that the share market is not a measure of the economy – rather it is a measure of what the economy will be at some point in the future.
As I discussed in Covid-19 Update 3 markets spent much of March trying to price in the worst–case scenario for the global economy, and by any measure, what the market priced in was not good. The Australian share market fell 30 percent in the fastest market retreat ever seen in Australia.
In March, job losses had commenced but we were only just beginning to understand the full impact the Corona virus would have on our lives, the community and the economy. To put this in perspective, most developed countries rely on consumer spending for about 60% of their economic activity. With restaurants, clubs, pubs and most shops closed, that puts a big dent in GDP. Being forward–looking, the share market had pre-emptively priced in a long and painful recession.
Roll forward to April. As the real economy got worse, the financial share market recovered, rising almost 9 per cent in the month. This recovery can only be explained by the view that the collective opinion of all market participants is that the economic impact of Covid-19 is going to be less severe than they thought it would be in March.
There’s a fascinating piece of social research being conducted by CoreData Research during the Covid-19 Crisis, and it might give us some insight into why the markets picked up in April. Back in the first week of April, 62.3 per cent of Australian households surveyed reported that their household financial situation would be negatively affected in the next 12 months. Incredibly, by the end of April this number had reduced to 24 per cent. Perhaps things aren’t hurting as much as we had expected?
The reality we face is that the ‘Great Lockdown’ will have very significant economic and share market implications. The International Monetary Fund has estimated the Australian economy will slump over 6.5 per cent in 2020, followed by a recovery in 2021.
In the GFC the stream of bad news was seemingly endless – so too with the Great Lockdown. One day we have cause to be optimistic, the next we feel pessimistic. I’m afraid this will be the way of things for some time yet. As a result, we can expect a great deal more volatility in markets in the weeks and months ahead.
Join us for Leadership on the Front Foot
We have had many reports from our clients of them trying new things during the lockdown. I’d love to hear from you about what you’re doing that’s different. For me it has been the launch of Leadership on the Front Foot, a live webinar series where you can ask questions of some of our best and brightest leaders. You can find the first episode here.
This week on the show I will interview Alex Hof, an experienced clinical psychologist. Alex and I will discuss the art of positive thinking, and the influence that can have on our lives at a time like this.
Other interesting reading…
