Why are share markets going up?
Markets have surprised on the upside over the last few months, consistently beating investors’ expectations. But is this simply a rally during the start of a more prolonged market downturn, or are we at the start of a new bull market?
The Australian share market has proved surprisingly resilient since it reached its most recent low on 23 March when the S&P ASX 200 index bottomed out at 4564 points, after achieving an all-time high of 7199 points in February.
And while it’s been volatile since then, the market reached a new peak of 6148 points on 10 June, followed by a volatile few days due to investor nerves over indifferent economic conditions in the US and the fear of a second wave of COVID-19 cases across some countries.
Market volatility is likely to continue during this challenging time, and because of that, it’s worth exploring the factors that are contributing to the current share market conditions. It’s also important to understand the risks that remain.
Consumer confidence recovery
Improving consumer confidence is a key reason why markets remain on track. The Westpac/Melbourne Institute Consumer Confidence index rose 6.3 per cent in June after rising 16.4 per cent in May, suggesting Australians are starting to become more positive about the economic outlook, and the flow on to company share prices.
There are also a number of reasons why consumer confidence could be on the rise. The $239 billion federal government stimulus package including the JobKeeper and JobSeeker incentives, as well as measures by financial institutions to allow mortgage holders to defer their repayments, are also helping to put cash into Australians’ hands. This money goes back into the economy and supports it, which in turn helps support share market performance.
The gradual relaxation of pandemic-induced lockdown restrictions is another reason consumer confidence is improving. This also helps the economy, as we now have more freedom to spend. The fact Australia has fared relatively well during the COVID-19 crisis could also be prompting Australians’ more positive view of the future.
Rising consumer confidence, in turn, leads to more positive investor sentiment. This is because when consumer sentiment is buoyant, people tend to spend. This will support earnings from retailers and encourage us to spend our money on non-discretionary items, which will in turn helps the profitability of companies in these sectors and the share market overall.
Risks remain
While stronger consumer confidence is good news for the share market, there are still many risks that could drive the share market lower.
Economic growth (GDP) dropped by 0.3 per cent in the March quarter and is expected to decline further in the June quarter before recovering. This data, however, has already been factored into the share market. Should actual figures for economic growth come in below the forecast for improvement, this would drive the market lower. But if economic data meets or exceeds expectations, this may drive the market higher.
The August profit reporting season will be a key milestone for the market. This is the period during which companies that are listed on the Australian Securities Exchange announce their earnings. Most companies typically provide guidance to the market about their results, however, few have this year as they are uncertain how their business will be affected by the pandemic.
This makes it slightly more difficult to tell, at this stage, how companies have performed during this year. Most are expected to announce significant reductions to their profit compared to last year, but just how significant remains to be seen. The share market will be supported if companies’ results are better than expected, however it could fall if company performance is worse than anticipated.
A second wave of the virus could also cause the market to drop, however mitigation strategies such as widespread testing, gradual easing of lockdown provisions and quarantining of overseas travellers are helping to supress this concern. Should this change, however, expect the market to be impacted.
Future outlook
While the market appears buoyant for now, investors should expect more volatility, at least for the short term. Nevertheless, although no-one can accurately predict what will happen, share market performance should be supported as long as positive economic data continues to be announced.
Diversification is one of the best ways to protect a portfolio from the market’s ups and downs. This involves investing in a broad range of asset classes and sectors to smooth out returns.
Source: https://www.bt.com.au/personal/smsf/manage-your-smsf/investment-insights/why-is-the-stock-market-going-up.html