This indicates that after an initial slump, demand for goods and services has rebounded very strongly. Short of the global economy being derailed by an unexpected event, we expect economies to grow strongly as the vaccine rollout takes effect.
In Australia, the unemployment rate has dropped to 6.6 per cent with 50,000 people returning to work in December alone. This rate is well in line with the long-term average and adds weight to calls for the job-keeper payments to end.
Back in November, I wrote, “With the US death toll over 240,000 and the current case count at 10 million and rising by 165,000 per day, the next month will be an extraordinarily challenging time in the US as cities shut down and hospital systems are stretched to the limit. We cannot underestimate the impact this Covid-19 spike will have on US society, their economy and confidence. It’s possible we will see a significant short-term impact on the US economy, and markets will likely see increased volatility.”
Despite over 26 million Covid-19 cases and almost 250,000 deaths, the US stock market has simply shaken off the pandemic and carried on its merry way. Since the US share market’s first Covid-19 reaction in March 2020, the US markets have recovered very strongly – the Dow Jones Industrial Index is up 65% for the period, and the S&P500 index is up 71%.
In Australia, the All Ordinaries index has risen 46.35%. This means that all our client portfolios have gained back the value lost because of the initial sell-off in March.
Given the underlying economic conditions share markets have been very strong. As a forward-looking barometer of future economic expectations, this isn’t unusual given the economic stimulus in hand, however, some areas of the market, particularly technology have seen phenomenal price appreciation with little to justify the growth.
We can only conclude that there are some market participants engaging in highly speculative activity as they drive up the value of a handful of tech stocks. There’s a big difference between investing and speculation. Investors take the long view, expecting their share values will increase in line with improvements in business and economic growth. Speculators, on the other hand, care little for the fortunes of the underlying investment – they are in and out, hoping the next investor will buy the stock from them at a higher price. It’s called The Greater Fool Theory.
Sadly, market speculation produces many more losers than winners and speculative markets inevitably correct – often sharply.
Fortunately, Capital Partners portfolios remain very well-diversified and have significant exposure to the many real companies that will benefit from the global economic recovery. This enables us to put the tech sector into perspective, and this is yet another of those times where tuning out the noise and staying on course will more important than ever.
Our investment specialist, Luke Sheather discusses markets more closely in his January market update, where he unpacks some of the reasons higher share price valuations may be justified.
We have never claimed to have a crystal ball and this pandemic period has been so unusual that no one has the playbook. I take most predictions – particularly those over-optimistic or over-pessimistic – with a grain of salt. We do know that in Australia, the Reserve bank is determined to keep interest rates low for an extended period. This is great news for borrowers, but it also feeds into higher asset prices.
For the share market, there may well be a shakeout particularly in the tech sector where valuations seem stretched. Across the broader market, companies will benefit from recovering profits as we return to more normal conditions, however, it is probably true that much of this value is already priced into share prices.
There’s one thing I do believe. A positive mindset is critical to surviving and thriving in 2021.
A positive mindset is not an optional extra for thriving in a pandemic, because when we understand the brain science, we recognise just how readily the human mind searches for the obstacles in every situation.
Sure, the year ahead will be uncertain, but if we remain positive, upbeat, and confident, we will be in the best position to be resilient and to keep moving forward.
Here’s to a great 2021!