March 11, 2020 20:44:34
The wave of selling taking place on the share market right now seems unrelenting.
It’s been so strong that the benchmark ASX200 index and the All Ordinaries index are now both in what’s known as “bear market” territory.
That means top-to-bottom losses of at least 20 per cent. In dollar terms, we’ve seen hundreds of billions of dollars wiped off the market every week.
The reasons for the stock market plunge are well-known.
There are fears the outbreak of the coronavirus will cripple the global economy, send many firms to the wall and leave many Australians unemployed. Add to that an oil price shock and you have the makings of a financial crisis.
The run on toilet paper captures the panic mindset that we’ve also seen in financial markets.
Apart from looking into the bathroom cupboard and finding you’ve run out of toilet paper, how does the financial and economic environment we’re in now actually affect you as an individual?
Share market gains and losses
Most younger Australians have time on their side. That’s a big advantage when it comes to investing.
As you can see from this chart, there’s a truism when it comes to investing in the share market: the market always rises over the long run.
So, if you’re a worker with superannuation, history suggests that over the next few decades your balance will return to what it was late last year and then keep growing again.
For those in or approaching retirement, it’s a nervous time.
It’s important to note that share prices are coming down from all-time highs. So, while the market is down over 20 per cent, it’s still well above where it was back in 2012.
That said, if you have hundreds of thousands of dollars in your nest egg, your wealth will have been cut in the past couple of months, and the time at which you shift to the Age Pension, assuming share markets don’t immediately recover, has been brought forward.
However, if you sell now, financial advisors say, you are crystallising your losses.
It all depends on whether you need cash now. Some retirees who run their own self-managed super funds have told the ABC they have sold a few shares just to make sure they have some cash, or income, for the next six months.
The jobs market
However, the share market doesn’t operate in isolation.
The market itself is reflecting a material or serious deterioration (of profitability) in Australian businesses, big and small.
For some, with mountains of debt, as cash flow dries up (as people spend less), many businesses may go to the wall. The only option for many companies will be to make certain positions redundant.
Losing your job in a downturn can be both a psychologically shocking experience and a traumatic event.
Once you’ve recovered from that, though, the overwhelming advice is to keep applying for jobs, consider trying your hand at a new career where there’s more demand for workers, and re-skilling or resuming your studies.
Economists say the shock and recovery process of an economic downturn creates new industries and jobs. Anticipating where these new opportunities might be, they say, is crucial for job seekers.
Save or spend?
Deutsche Bank, AMP Capital, the National Australia Bank, BIS Oxford Economics and Bloomberg Economics all say Australia will enter recession in 2020 or experience a major economic shock.
The majority of Australia’s economic growth is generated by shoppers spending at the stores. Naturally, the government wants employers to keep employees on the payroll so they can keep spending.
That’s easier said than done. Why? Because it’s only natural to want to protect your own wealth.
Or, as chief economist of RBC Capital Markets Su-Lin Ong puts it:
“As much as the Prime Minister and others like to downplay some of that to a degree, I think the reality is that for both households and businesses, the underlying fundamentals will be quite weak and that needs to be taken into account when thinking about expenditure and borrowing.”
Getting by day-to-day
The pictures of toiler paper runs have also shocked, saddened and angered many Australians.
Of course, it’s upsetting to see shoppers fighting with one another to secure dunny paper.
The psychology behind it is similar to a bank run.
The reality is that even if a bank is in sound financial health, if a mistruth is spread that it’s not, public panic can develop and everyone rushes to take their money out of the bank.
While the coronavirus will knock out many business supply chains, Australia, for a start, is currently well-stocked for groceries and the ability to make those groceries.
As a spokesperson for Woolworths, Australia’s biggest supermarket supply chain, recently put it:
“Our teams are continuing to work hard on restocking stores with long-life food and groceries from our distribution centres.”
“The vast majority of the products in our range remain available for our customers as normal.”
In the space of little over a month, Woolworths’ share price on the ASX has effectively crashed, down 20 per cent.
This means Woolworths, as a corporation, has a reduced capacity to raise funds (extra cash or finance). Put simply, it’s technically harder for it to grow its business. It does not, however, prevent the grocery chain from re-stocking its shelves with loo paper.
A time for calm
Economies grow and retract, as do share markets.
The coronavirus has a finite life, but the damage it does to the share market and the economy will take time to work through.
The hope in the meantime is that we don’t exacerbate the problems by misunderstanding or overestimating how they will ultimately affect us.
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March 11, 2020 19:09:15