How the stock market has differed from the economy
Most people assume that the stock market is purely reflective of the economy in reality the two are different beasts. Amidst the COVID-19 we have seen unemployment rates rise to an all-time high, many small businesses go into voluntary administration.
However, as co-host Mitch Olarenshaw explains – the stock market is up somewhat 25%+ from its lows in March with the S&P500 and DOWJONES indexes rising above their crucial levels of 3,000 and 25,000 respectively indicating an extremely strong performing bull market, even despite the economy falling away.
The question arises, how can this be? Host Andrew Baxter likes to think of this disconnect as the dog and its tail. The tail wags the dog and at times the dog wags the tail. Needless to say, as our economic outlooks continue to experience this.
The stock market has seen its strongest V-shaped bounce of all time. The message – the economy and the stock market are not the same things.
What could derail this recovery in the stock market – the earnings crunch
There’s no doubt that as the dog wags the tail and we see an earnings crunch for our businesses. Host Andrew Baxter says that as our government funding begins to slow, our big Aussie companies start to feel the monetary effects of this pandemic.
As Baxter explains – “we are probably a reporting season away from seeing this bite from the economy in the stock market”, which coming up for air. Other industries to watch out for that will surely have negative flow on effects for the economy once our stimulus package wears off are the construction & tourism industries which essentially have no use in this current economic environment.
The unknown – something that could cause a serious leg down
Yes, the earnings crunch is expected to have its effect on both the economy and the stock market, however, this may cause a serious leg down. As we find ourselves in the middle of a trade war with China and imposing restrictions on human rights.
Something like a war with China could cause a significant sell off in the stock market which to the most part at this point is still relatively unknown. Already our agricultural sector has struggled given the implications on beef exports which is definitely able to be mirrored onto our mining and energy sectors who rely on China as their primary source of business. Businesses like FMG or BHP for example are ones who may suffer through this.
