A series of fortunate events
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What a difference a few months can make. Things were feeling really bleak in August. Melbourne was one-month into its 110-day lockdown, being bombarded with 700 new Covid cases and dozens of deaths every day. It was tough economically as well. In Australia, we had just entered our first recession in almost 30 years. It was a severe one too; the worst economic slowdown in more than 60 years.
Today, it feels like we have turned the corner. We are seeing record share prices in the US, rising house prices in Australia, and even economic growth again in China and other parts of Asia.
So, how did this happen and what does it mean for retirees and their investments in the months ahead?
A confidence led recovery
Despite the number of global Covid cases growing faster every day, people are feeling more confident. In fact, we’re feeling more confident than we have at any time in the past seven years. According to the Westpac Melbourne Institute’s consumer sentiment index, consumer confidence has increased faster than any other time in its records.
And record low interest rates are driving up property sentiment. The Westpac Melbourne Institute’s "time to buy a dwelling" index surged 8 per cent to its highest reading since November 2013, while its House Price Expectations index jumped 12 per cent.
Unsurprisingly, this rising property sentiment is having a positive impact on house prices, which rose in September in every Australian capital city except Melbourne.
As confidence in the property market grows, people feel wealthier and confidence in spending also grows. Westpac's "time to buy a major item" sub-index rose 6.7 per cent to record its highest level since August last year.
This is consistent with the Reserve Bank’s position that household consumption will surge 13 per cent by June 2021.
Markets love certainty
Over the past month things have become much clearer. It appears we have successfully managed the second wave of COVID in Victoria and NSW, with more than a week now of no community transmissions.
Melbourne is cautiously reopening, which is stimulating the second largest economy in Australia. The Reserve Bank has upgraded its growth expectations and now expects the Australian economy to recover to pre-COVID levels by the end of 2021.
In the US, we now know that Joe Biden will be President for the next four years, voted in on a platform of unity and climate action.
But it’s the positive news on the prospects of a vaccine that has the share markets really booming. First Pfizer surprised us with news of a vaccine that is proving 90 per cent effective in its Phase Three clinical trials. Now rival Moderna has announced a vaccine that is even more effective.
Suddenly we are faced with the very real prospect of having several vaccines available by the end of the year.
Keep your head
It’s no wonder that the US market has hit all-time highs. Even the Australian market is now within ten per cent of its pre-Covid record highs.
But there’s a strong argument that US shares are over-valued. Firms that make up the US share market index are trading at a sky-high average multiple of 30 times earnings. That’s even higher than levels immediately before the Great Depression.
So retirees would be wise to stay cautious during this time of exuberance. There’s still plenty of uncertainty that needs to play out.
Even if the vaccine is ready by the end of the year, it will require an unprecedented logistical feat to roll it out around the world. As the northern hemisphere heads into winter and the number of Covid cases accelerates even faster, the rollout will be slow and torturous. There will be mistakes and the human toll will be tragic and felt even more acutely.
Closer to home, there is a real risk of further economic contraction when the stimulus packages end in March and businesses face the true impact of the economic crisis. And things can change quickly with Covid, as we’ve seen with the outbreak in South Australia which required an immediate shutdown.
What to do next
Make sure you have enough set aside for the next few years, and if it’s been a while since you last rebalanced, it’s probably a good time to review things. When it comes to retirement investing, there’s no place for setting and forgetting.
It’s at times like this that the true value of advice becomes apparent. At When Financial Solutions we hold our clients accountable, so they don’t lose their heads when markets are tumultuous.
Because when you deal with us, it’s not a matter of ‘if’ you will feel secure in your retirement but ‘when.’
Michael Bowman and James McMaster are co-founders of When Financial Solutions. This article is general and does not consider your personal circumstances. If you would like advice specific to you please give us a call.