Why the share market is not the same as the economy

Why the share market is not the same as the economy

Updated on Economy, Finance

At the beginning of 2022 the Australian economy appeared to be sliding into recession, dragged down by higher interest rates and even higher inflation levels. As a result, it was tempting to believe the share market was also set to tumble. And while that’s not impossible, the local market traded higher during each of Australia’s last nine recessions, with some of the strongest trading on the Australian share market occurring when the economy was contracting. For example, 1983 was the best year ever on the Australian share market, climbing 60 per cent higher, while the economy was stuck hard in the 1981-1983 recession. So, while it is tempting to think poor economic times mean a dismal outlook for the market, there are four key reasons why that is usually not the case. Firstly, the market is driven by expectations. There is an old saying; investors buy on the rumour and sell on the facts. Big share market falls occur suddenly, well before the economy officially moves into recession, as investors promptly react to bad news. Once the economy is in recession, investors look to the future and how companies can take advantage of emerging opportunities in an improving economy. Improvements that can take time to show up in economic data. Secondly, the share market reflects investor sentiment, while consumer concerns and beliefs dominate the economy. Consumers might cut back on buying clothes or going out in preference to boosting savings when they fear bad times. In contrast, professional investors are constantly looking for opportunities, and economic downturns where small businesses go bust and consumer sentiment changes, usually create them. Thirdly, the share market comprises large successful companies. In contrast, economic statistics are dominated by what is happening to individuals and small businesses. Two groups that can respond very differently to world events. For example, the war in Ukraine prompted a rise in energy prices, particularly for oil. Most individuals and small businesses responded by cutting back on their petrol consumption, while large oil companies are cranking up production to take advantage of these higher prices. Finally, the share market has a much smaller universe than the economy. The market is made up of large companies entirely focused on getting larger and more profitable and, in doing so, attracting more investors to support their efforts. The economy is made up of Governments, individuals, and small businesses, all making a wide range of decisions about how they will live and operate in an ever-changing world and are basing those decisions on a raft of factors. So, while the share market and economy are connected, they are influenced by widely different variants that often see them heading in different directions.     The information provided in this article is general in nature only and does not constitute personal financial advice. 

Economic Update: April-June 2021

Economic Update: April-June 2021

Updated on COVID-19, Economy

Employment surprise JobKeeper was a cornerstone of Australia’s response to the coronavirus pandemic. It provided millions of Australians with an ongoing income and kept thousands of businesses afloat, so when it came to an end in March expectations were that there would be a sharp spike in unemployment. One estimate was that 150,000 workers would lose their jobs. Happily, that wasn’t what happened. From March to April the unemployment rate dropped from 5.7% to 5.5%, then fell to just 5.1% in May. That’s below the 5.2% that applied in January 2020 before the pandemic hit, and an amazing outcome given the damage that COVID-19 continues to inflict on a virus-weary world. Housing continued to sizzle… Aspiring homeowners and upsizers endured another quarter of woe as home prices continued to soar. Nationally, dwelling prices were up 6.1% for the quarter and 13.5% for the year, with houses outperforming units. Of course, on the other side of the equation are homeowners, many of whom are delighted by the significant boost to their wealth. Continuing low interest rates remain the key driver, but other issues have played a part, including stamp duty discounts and households redirecting the cash they would otherwise have spent on overseas holidays. Lockdowns last year also affected the normal supply of property leading to pent-up demand. As subsidies are rolled back, supply and demand normalise and if population growth remains low, property price growth may well come back to ‘normal’ levels. And despite the RBA not expecting to raise interest rates until at least 2024, some economists are pointing to the low unemployment figures to predict that interest rates may begin to rise by the end of 2022. There is also growing speculation that the RBA and APRA will lift lending standards (e.g. requiring lower loan to valuation ratios) in order to rein in galloping price growth. …as did share markets Global markets performed strongly over the quarter with many setting record highs. Locally the S&P/ASX200 rose 7.7%, beating the MSCI All-Country World Equity Index, which was up 6.9%. Tech shares were back in the lead with the NASDAQ gaining 11.2%, while the S&P500 rose steadily to gain 8.6%. The Aussie dollar fell slightly against the major currencies weakening late in the quarter following talk that the next move in US interest rates may be up. Also… – Workers receiving the minimum wage will see a boost to their pay packets from July, with the minimum wage rising by 2.5% to $772.60 per week or $20.33 per hour. – Most people will see the superannuation guarantee (SG) payment from their employers rise by 0.5% to 10% of normal wages. This is one step on the path to raising the SG to 12% by 2025. – According to Credit Suisse, nearly one in ten Australians are now millionaires. Twenty years ago the figure was less than 1%. Of course a million dollars today doesn’t have the buying power it did 20 years ago, but only Switzerland has more millionaires per capita than we do. – Massive infrastructure projects and home renovation booms have caused a global shortage of building materials. An indicator, perhaps, that some COVID-19 stimulus measures have been a tad overdone?   The information provided in this article is general in nature only and does not constitute personal financial advice.

Quarterly Economic Update: January-March 2021

Quarterly Economic Update: January-March 2021

Updated on COVID-19, Economy, Investing

The global COVID-19 jab-fest gathered pace with some countries, including Israel and the United Kingdom, achieving high rates of immunisation. However, the rollout has had some issues. Rare side effects linked to the AstraZeneca vaccine saw a number of countries suspend its use for a period of time, and Australia was slow off the mark with its immunisation rollout. The longer it takes to vaccinate the world, the slower the economic recovery. Hot property Pushing COVID-19 off the front pages was the big jump in residential property prices. Nationally, CoreLogic’s home value index jumped 5.8% for the quarter. Sydney led the jump with a 6.7% lift. In March alone the index rose 2.8%, the biggest rise in 32 years. Most of the action was on the first home and owner-occupiers front, though investor purchases were also up. The main fuel being added to the property price fire is ongoing low interest rates. With the RBA indicating rates will most likely remain low for years, that could continue to inflate property values and see more people priced out of the market. Helping to fuel the market was good employment numbers. Seasonally adjusted, the ABS reported an unemployment rate of 5.8% in February, down from 6.3% in January. However, this counts people on JobKeeper as employed. Taking this into account, Roy Morgan put unemployment at 13.2% in February, with 21% of the workforce either unemployed or under-employed. Blocked artery In late March the container ship Ever Given provided a graphic example of how small things can have a huge impact. Strong wind gusts saw the giant ship wedge itself bank to bank across the Suez Canal, one of the world’s main shipping arteries. Suddenly 30% of world container shipping ground to a halt. Fortunately, the ship was freed after a few days, and the backlog of ships was cleared a few days after that, but it was a stark reminder of how vulnerable large parts of the economy are. Key numbers The pace of recovery in the local and international share markets slowed during the quarter as prices crept close to or exceeded their pre-pandemic levels. The S&P/ASX200 rose 3.1%, trailing the MSCI All-Country World Equity Index, which was up 4.2%. Tech shares ran out of puff with the NASDAQ only gaining 1.4%, while the S&P500 surged late in the quarter to gain 6.1%. The outlook Many countries are experiencing third and fourth waves of COVID-19, and it’s a fair bet that the virus will continue to dictate the way we live for some time to come. But it’s not the only game in town. US President Joe Biden has taken climate change off the back burner and moved it front and centre. That means our government and businesses will need to pay it a lot more attention too. Expect carbon tariffs to become a hot topic. On the local front, with interest rates all but ruled out as a tool for managing the residential property boom, talk is turning to the use of regulatory methods to dampen demand. These could involve requiring bigger deposits or limiting the rate of credit growth. And with JobKeeper now wound up employment figures will come under close scrutiny. Expect to see a jump in unemployment this current quarter.   The information provided in this article is general in nature only and does not constitute personal financial advice.

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