Beware the COVID Bubble

Jul 17, 2020 | Investment, Reflection, Shares, Superannuation

I’m worried about the markets. And I think you should be too.

Why? Because we might be in a COVID-19 economic bubble. And if it bursts, it won’t be good.

But there is still time for you to act to protect your finances.

Significant adjustment

As an independent financial advisor, the question I’m asking myself – on behalf of my clients – is this: Are we staring down the barrel of a significant economic adjustment because of COVID-19?

My answer: Maybe, yes.

Volatile markets

The market has been volatile over the last six months. A pre-pandemic high of 7200 in the ASX 200 index was reached in late February. In March we saw a low of 4500.  Now it’s just under 6000. So the markets have made a recovery of sorts. But why?

  1. Markets are forward looking. They believe a vaccine or other medical solution is expected.
  2. The Reserve bank of Australia and other central banks have acted to prop up the economy and there is confidence that stimulus packages will prevent significant economic damage.
  3. With interest rates so low investors are on the search for a return and equity markets are seen as a good place to gain that return.
  4. Trend or momentum is a factor: If markets are thought to be recovering more and more money piles in for fear of missing out, leading to higher markets.

The bubble

I’m hearing talk of a virus bubble because the market has separated from the economy. Actual unemployment and GDP figures are not being reflected in markets. Here are some worrying signs:

  1. A vaccine may not be found and even if it is found in the next six months how many shots can be produced and distributed? How long will the vaccine last? Will there be side effects?
  2. The virus may continue to spread at increasing rates. There are now around 200,000 new cases a day worldwide and record numbers in the US. Victoria remains a concern.
  3. The effect on tourism and hospitality. Qantas has cancelled all international flights to March 2021, bar NZ. With no international tourists, the effect on these industries could be severe for a prolonged period.
  4. Many sectors of the market are being hit with a fall in earnings. Numbers can’t be ignored. The outlook that is not overly promising.
  5. The US presidential election is unpredictable. Trump or Biden? What are the economic outcomes of the election result in the world’s most powerful economy?
  6. US-China and China-India relations are not good. Political tensions and trade wars seem to be growing in intensity.
  7. The economic cliff of September is looming: Jobkeeper/Jobseeker and other massive government supports may end with uncertain impacts across the domestic economy.

Port in a storm

Investing at the moment is like heading out for a cruise in a yacht. You check the weather forecast and there are concerns. But you think it will be OK and you are pressed for time. So you head off, despite the dark clouds on the horizon.

Consider now these two options, and the potential outcomes:

You sail on

  1. There is no storm. You get great conditions and reach your destination ahead of time and in good order. No damage done and you wonder what the fuss was all about.
  2. There is a very severe storm. It costs you a lot of time and a lot of money to fix the damage. Your financial boat might even sink entirely.

You pull into a safe harbour or slow the boat

  1. There is no storm. You have missed a few hours of sailing, disappointing but you may be able to make up the time with a good plan and some prudent choices.
  2. There is a very severe storm. You avoid significant damage saving a lot of time and money (because you don’t need to do major repairs). You boat is intact.

Sail on, or safe harbour/slow down?

What now?

I have never been a fan of trying to ‘time markets’ as research shows it is practically impossible. But the information we have at hand requires us to think seriously about the outcomes we could face.

How did you feel in February/March? Were you anxious as your superannuation and investment balances dropped? How would you feel if things got a lot worse?

The most pertinent thing to do right now is to consider your existing risk profile. Consider the issues and unknowns, revisit your goals and objectives, reflect on your investment timeframe and weigh up some best/worst case scenarios. Then position yourself in case a storm comes through.

If you want me to help you with that, that’s what I’m here for.

This article is not financial advice. It doesn’t consider your personal situation. But it is my earnest perspective for you to consider.

After you have done that, if you want like to make an appointment to discuss how to protect your finances in case there is a COVID-19 bubble, then just reach out.


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