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From the Bunker: The COVID created disconnect: the markets versus the economics

We take a look at why the market is behaving as it is and what lays ahead for COVID affected economies.

By ·
19 Jun 2020
  • Employment figures from the USA and Australia show significant drops as a result of COVID-19 with the longer-term effects still unknown.
  • Strong equity markets both in the USA and here in Australia appear to be pricing in the central bank's willingness to 'do what it takes' to get through this crisis.
  • The medium to long term outlook is difficult to predict; however, there is the optimistic tilt that economies will gain traction quickly as they emerge from lockdown.

Since the beginning of the COVID-19 crisis, it's hard to miss the continuing economic commentary around COVIDs impact on financial markets. Even the From the Bunker webinar series has covered specifics like how unemployment, housing, super, banking, and dividends might be affected. You can view previous episodes here.

But, like economics itself, a lot of this commentary is like trying to drive a car on a winding road with only the use of the rear-view mirror. At the same time, markets seem disconnected more than ever from events.

As of Friday, June 5, the Australian share market was up 32% from its March 17 low with the S&P/ASX 200 index briefly touching 6000. These equity market rebounds appear driven by central banks and their various forms of Quantitative Easing (QE). Even central bankers like the Fed's Jerome Powell have gone as far to say they'll do what it takes to get through this and they'll likely have to get creative after the large drops seen in US Non-Farm Payrolls which Evan discusses in the webinar.

However, there is cause for optimism. A lot of data that has been a cause for concern is retrospective. As economies begin to unwind their lockdowns, this could give traction to a speedier turnaround. Evan and I cover off what these scenarios may look like in the near future, plus answer questions from our live viewers.

To wrap up, despite the ongoing uncertainty we remain confident that an adequately diversified portfolio is the appropriate way to navigate these markets. Chopping and changing your approach based on yesterday's news will not result in you dodging the potholes. One thing is for certain though if you choose this approach. You'll burn up cash with brokerage expenses and you'll be more likely to zig when the market zags and come unstuck.

 

You can watch the recording below:


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