Economy

“COVID19 – did it even happen?”

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This was a question posed in our investing group recently.

It’s a little facetious I know, because Covid-19 undoubtedly DID happen – just look around you to see how the world has changed.

But what the question was regarding, is the fact that the markets – the Australian stock market (ASX) to be specific, is charging full steam ahead for a V-shaped recovery.

Case in point, there are now stocks whose prices are above their pre-covid levels!

Stock A (well-known iron ore producer)

 

Stock B (lesser well-known IT company)

Of course, these are only two companies – but if I dig deep enough, there are more companies showing similar price momentum.

Is COVID-19 just a speed bump on the relentless highway of growth?

Maybe

The markets are often labelled as a reflection of future expectations.

We buy stocks today in anticipation of future returns.

If enough people believe in the expectation and buy or sell accordingly, so does the market.

Right now, the ASX is pricing in a swift and complete recovery, hence the V-shape.

But is this warranted?

Maybe not

I mean, guys come on – the sheer volume of negative data out there is ridiculous.

US unemployment numbers are nearing Great Depression levels

Here in Oz, our unemployment numbers have seen almost one in five workers lose their jobs entirely, or at least in the numbers of hours worked.

Our biggest trade partner – China, just released numbers to show imports dropped 14.2% and exports rising a mere 3.5% (largely due to health e.g. masks). These are recessionary numbers.

Neve Campbell On 'Scream 5', 'Party Of Five', 'House Of Cards ...
Er no, a different kind of masks being exported.

Not to mention the increasing likelihood of Chinese trade tariffs against Australian firms and industries.

Oh and the simmering Cold War between the US and China (which forced Australia to pick sides).

I could go on of course.

Yet, despite all this, the stock market continues merrily on.

What’s going on?

It could be anything.

  • Overseas and local institutions buying into our market because Australia has (largely) escaped being battered by COVID-19, and we are coming out of lock-down.
  • Our economy is one of the best in the developed world, with the four major banks – the pillars of the economy – among the strongest globally.
  • Flight to safety – as the monies flow in, from those countries with increasingly weaker or shakier prospects, into ours.
  • Hunt for growth – many participants in the market do not hold a “multi-decade” investment horizon, whichever market has momentum and is moving, will always attract cash inflows.

Will it continue?

No one knows whether the market will be higher tomorrow, next week, next month or next year even.

However, where I sit (in my hattefjäll IKEA chair), there are four courses of action:

HATTEFJÄLL office chair Gunnared beige 110 kg 68 cm 68 cm 110 cm 50 cm 40 cm 41 cm 52 cm
With its tilt tension mechanism, built-in lumbar support and pressure-sensitive brake, the hattefjäll is THE must have accessory for the work-from-home professional.

Buy 

If you are a true believer that the worst is over and the recovery will be V-shaped, then it’s a no brainer – buy more.

Those companies which have been battered from pillar to post – airlines, tourism, accommodation etc – they will SURELY bounce back.

Hold

If you are already invested, and comfortable with what you hold at the moment, it might be prudent to just wait it out. This is especially good if you have a longer investment horizon – in ETFs or strong blue chips for example.

In 10 years, my money is on the market being higher than it is today.

Sell

If your name is *Jaek and you’ve just made $175,000 in 4 weeks AND you are not convinced the rally will continue, you might consider selling down a portion or all of those holdings to LOCK THAT SHT IN BABY.

*Jaek’s real name is not used, so don’t worry Jake, you’re still good.

Sit on the sidelines

If you’re silently laughing at all those “noobs” who jumped in with the unwavering belief that this rally is a bear trap, or you think that the markets have a ways to fall yet, or perhaps just dazed and confused with what’s going on – you might consider waiting it out.

A part of me is in this camp. But then a part of me is in every camp. I like camps.

~~~

I think we will find out more in say… 6 months time.

This will provide a clearer picture with everything that’s going on, the government subsidies will end, the banks’ loan repayment holidays will end and most important, we’ll be able to see how each country has dealt with COVID and the economic impacts to each.

Just be aware that when a clearer picture forms, the markets will have moved way before that.

I’ll leave you with a very profound quote my friend Shen G said recently:

“Everyone is optimistic, how do you arbitrage that though?”

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P.S. As always, please do your own research, all posts are opinions of yours truly. If you are like MrsFrugalSamurai, then feel free to ignore mine.

2 Comments

  • Janus

    Equity markets are being propped up by central banks. Rather than a V shape recovery, what more likely happen in the short to medium term is shares trading within a range, driven down by negative earnings but driven up by more promise of stimulus and ending of lockdown. The only certainty is that there will be plenty of volatility.

    What’s also helped Australia is continued strong demand in iron ore, underwritten by a global drive for infrastructure. This demand is unlikely to wane as economies come out of the pandemic.

    • The Frugal Samurai

      Yeah, I think volatility will definitely remain the course – maybe good for swing trading? I’m increasingly nervous about China rattling its sabres at Australia’s direction. Be interesting to see how this all plays out.

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