Author: Leigh Jobling, Partner, TAG Financial Services
Here we are, sitting at home watching the news……
- We are in a recession (no one has mentioned the “D” word yet, but that’s for another time)
- Business collapsing
- Our major airline carrier posting a $2 billion loss
- A looming US Presidential election
- House prices in decline
- Tension between China and “the West”
- Oh, and I almost forgot…….the most significant world health crisis in over 100 years and the Coronavirus showing no signs of slowing down.
So why on earth is the US sharemarket at an all time high? Why has the Australian Share market recovered about 2/3 of its dramatic fall in March 2020 – it would be 100% if not that a large part of our market includes the 4 big banks which are still well down from their February highs.
As we’ve said before, sharemarkets are predictors of the future. They listen to the daily news too and sometimes react, but the value of a share in a company and the value of a country’s overall sharemarket is a product of the earnings outlook of the companies that made up that market.
In Australia, we are working our way through year end reporting. Have you noticed a company announce a huge profit decline or even a loss and that same day their shares go up? It’s because either the reported performance was not as bad as expected, OR, the company has provided an optimistic outlook for the year ahead.
The overarching reality is even with all the negative commentary, there is a global expectation that governments and world banks will provide world economies the stimulus necessary to get back on their feet while we wait for a vaccine to arrive. It’s also interesting to observe the companies that have exceeded expectations and performed well during the Coronavirus pandemic – namely on-line retailers and technology companies.
This is the S & P 500 Index in the US – has recovered 100% of market correction
This is a NASDAQ index in the US – up nearly 20% from pre correction high in late February
It certainly feels like another DotCom bubble with companies like Apple, Amazon, Netflix, Microsoft, Google, Facebook and Tesla outperforming companies in more traditional industries.
We also have many companies that have never made a profit and don’t expect to for at least a few more years, but they are some of the most highly valued companies in Australia – again, expectation of their future profitability is high and the market is paying for the privilege to own those shares today.
Our message to you
- Beware the highly values tech stock. There is no doubt opportunity within that sector, but proceed with caution – they’ve had an amazing run.
- Stay strong to your long term strategy and ensure you have the necessary liquidity to ride out market volatility (you don’t want to have to sell during a market correction).
- Timing the market sounds great and can increase your returns if you get both the sell and the buy timing right. Ultimately it’s always a 50/50 bet and you are better off retaining exposure to the share markets even in times of uncertainty.
After all, even during these unprecedented and uncertain times, the share market can behave counter-intuitively to our expectations and appear dislocated from reality. The sharemarket clearly likes the potential reality of tomorrow, more than we are enjoying our “stay at home” reality of today.
If you have any questions, please contact us on 03 9886 0800 or via email.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2020. Please do not reproduce without the expressed written consent of the author.