September saw a break in the rally in global equity markets. Our All Ordinaries Index, for example, came off by almost 4% during the month (though it has caught it back up so far during October following the Federal Budget – Chart below). Several factors contributed to this, including signs that the global recovery, while proceeding, is nevertheless slowing down.
Increasing concerns about the prospects for fiscal stimulus in the US added to the volatility, and markets are increasingly worried about the US political scene with the election less than a month away and the first debate between Trump and Biden degenerating into a farce.
Australia continues to make good progress in reducing the spread of Covid-19 however the story is very different in many other countries. Worldwide the number of deaths surpassed one million (1,092,000 at time of writing) from over 38,500,000 cases. In the US, infections fell early in the month but then started rising again back to where they were at the end of August.
The US still has plenty work to do to get the level of infections down to more manageable levels before the onset of the Northern winter. In Western Europe, the second wave has been widespread with a number of countries including Spain, France, the Netherlands, Belgium and the UK reporting much higher rates of infection than in the first wave. Italy, Germany and Sweden are exceptions, but Russia and Eastern Europe are also seeing significant second waves.
- there were signs that the global recovery, while still proceeding, is nevertheless slowing down.
- here in Australia, real GDP fell 7% in the second quarter but this was not as bad as economists had expected.
- while the latest figures show some improvement in business confidence, both business conditions and employment intentions worsened.
- the spectre of business failures still looms once governments rein in the support packages, but in the meantime the support packages and low interest rates are fuel for the equity markets.
The fractious state of US politics is also proving a concern for markets the closer we get to Election Day on 3 November. At this stage, Biden still commands a lead over Trump in the polls, but anything is possible yet. The news that Trump contracted Covid-19 added to the uncertainty.
Some portfolio managers have commented that the result in the White House is not as important from an investment market perspective as the Senate outcome, which is very close. That is, Joe Biden may well win the White House and House of Representatives, but if the Republicans retain the Senate then not a lot changes and the markets won’t be all that rattled. Most agree that the worst result for markets would be a close White House election leading to an ugly, contested post-election confrontation. That would be bad for financial markets.
While we are always absorbing news about the Global economy or the Australian economy, it is important to remember we each have our own ‘economy’ – our job, our income sources, our surplus cashflow, our assets, our deficit/debt – and this is what we must focus on as we plot the path ahead through whatever the broader economies are. So it is important to have a strategy and regularly review it with us so you’re well prepared to ride through the rough patches with whatever your position. And we will continue to work with our research partners to stay on top of changes as they happen and across new data as it emerges.
Sources: RBA, Quilla Consulting, Chart-Yahoo Finance, Johns Hopkins Coronavirus Resource Center, Magellan, Schroders.