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What’s driving the current market rally and will it continue?
The COVID-19 health crisis continues to cause immeasurable human tragedy and suffering with virus numbers remaining stubbornly high. Thankfully, improved testing and treatment and better protection for the most vulnerable means that the death rate for developed countries is well down when compared to the peak of the outbreak earlier this year.
While the virus persists, with a devastating impact on society and economies, recent data shows that there are signs of recovery and we may be starting to emerge from one of the deepest, but also one of the shortest, recessions of the last century.
In November both the Australian (ASX 300) and US (S&P 500) markets both rose over 10%, a standout performance particularly when considering how challenged markets have been during the year to date. What’s driving this rally?
There are four key factors at play:
While the outlook has improved, markets have already largely built in a lot of improvement. Until vaccines are significantly rolled out, we may see markets vulnerable to resurgences in uncertainty.
Although the earnings outlook is brighter, low bond yields may persist for some time as central banks are emphasising getting rather than pre-emptively fighting inflation. This will act to prolong the recovery with jobs, rather than a lift in inflation, likely to be the main focus of central banks for some time.
The stand-off between the US and China will likely continue although it may be less overtly confrontational under the Biden Administration. Closer to home, relations between China and Australia appear to be worsening. In November shiploads of coal imports were held up in Chinese ports and huge tariffs placed on Australian wine imports. This could see Australia’s export trade suffer.
While it’s clear that the worst of the initial decline in economic growth is now passing, it’s still an uncertain time and markets do remain vulnerable to setbacks on the COVID-19 vaccine roll out. Seeing the balance of your superannuation/investment balance go up and down can be unnerving but it’s worth remembering that superannuation is generally a longer-term investment with time in the market much more important than shorter-term swings in sentiment.
Expert guidance can support you to navigate through this increasingly challenging market environment. Speak to your financial adviser if you’d like some support with your financial strategy.
Dan FarmerChief Investment Officer
Important information: This article is issued by IOOF Investment Services Ltd (IISL) ABN 80 007 350 405, AFSL 230703. IISL is a company within the IOOF Group which consists of IOOF Holdings Ltd ABN 49 100 103 722 and its related bodies corporate. This article contains mostly factual information which is based in part on information obtained in good faith from third party sources. While this information is believed to be accurate and reliable at the time of publication, to the extent permitted by law, no liability is accepted for any loss or damage as a result of reliance upon it.