During this COVID-19 pandemic, I purposely avoided writing about the stock market because if I did I would say I had an understanding of how the pandemic would affect our lives, the economy or the outlook for the Australian stock market. In hindsight, of course, there were stocks that would have been major investments, but even as we move towards 2021, the outlook for the markets is still very unclear.
In July 2020 I wrote:
“… we are dealing with uncertainty and this uncertainty has more to do with the hard sciences and less with the social sciences including economics. Economics certainly plays a role, but the next big step is likely to be driven by the news that either the worst of the COVID-19 pandemic is over, or a promising vaccine has been identified – or both.
(Excerpt from: The Australian Stock Market, COVID-19 and Dealing with Uncertainty) Now six months later, I would suggest that the market has essentially moved in line with my speculation outlined in that article. Since the end of January, the Index (XJO) has almost dropped back to pre-COVID-19 levels, as shown in the chart below.
S & P / ASX 200 Index 1 Year Chart (January 2021)
If we could have been sure in March that the market would recover, there were many opportunities to buy over-sold ASX-listed stocks. But in hindsight, it's always easy to keep the market low and back then the market could just as easily have slipped further. The question now is whether the market will continue to recover or has a lot of positive news already been priced in it? I suspect the market will have a hard time getting much higher this year and if the ASX 200 were to close in the range of around 6,500 – 7,000 that would be a good result.
Looking at the long-term trading range of the ASX 200, we can put the current level of about 6,607 (as of the end of January 2021) in some perspective. Firstly, it is worth noting that the COVID-19 correction was nowhere near as severe as the stock market rout caused by the global financial crisis (GFC) and secondly, the market is currently trading around the long-term trend line that I have charted. . Note that this is a very simple trendline and it basically takes away the GFC market bubble. If we then accept that this simple trend is more or less correct, then it is not unreasonable to expect the market to continue to gradually move up along this trend line in the long run. Of course, this doesn't mean there won't be meetings and corrections along the way, and I have often stressed that market corrections are not rare.
S & P / ASX 200 Index Chart 1993 – 2021 with trend line
Yes, governments across the G20 will take various measures to try to get their economies to grow again, but this will further add to the debt burden and remind us of the GFC and the lessons we should have learned about the risk of wrongdoing. prices will be forgotten. So we can be pretty sure that soap bubbles will be created (and some probably exist now), but it's not easy to identify them in advance, and it rarely is.
So at this point I am more inclined to make a profit instead of shifting cash to stocks. There certainly seem to be some stocks worth checking out and I'll cover those in my next article. But for now the market is looking a bit overpriced and I suspect we'll see a downturn in the coming months.
