Massive stimulus packages aren’t a new thing. You’d be forgiven for thinking that recent Australian packages should have had more of an impact on our sharemarket.
In October 2008, the US Congress approved the Troubled Asset Relief Program (TARP). This was 1 year into the Global Financial Crisis (GFC). The $700 billion stimulus package to strengthen the US financial system had an immediate impact on sharemarkets worldwide. The US-based Dow Jones had (until that point) it’s largest points-based gains in history in the immediate aftermath. It was a critical step in restoring confidence in investment markets.
In Australia, two stimulus packages have been announced in recent weeks (with more to come) to combat the economic impact of COVID-19. The following day, in both instances, saw the Australian sharemarket fall massively. In fact, the stimulus packages appear to have had no material impact on markets at all!
Back in the US, Trump is trying to get a $1.8 trillion (yes, trillion!) package through congress currently. This dwarfs 2008’s TARP. Unlike 2008, I can’t see that the eventual passing of this stimulus will have a significant impact on investment markets. It is possible it will have no impact at all.
It’s all common sense really. The GFC was, as the name suggests, a financial crisis. It makes sense that a stimulus package to shore up the financial system would provide an antidote to financial markets during a financial crisis!
Coronavirus is a health crisis. The stimulus packages released to date predominantly address an economic crisis. While they are inextricably linked, there is a disconnect between the two crises and the sharemarket sees this.
The government is putting in place many measures to ‘flatten the curve’, but they are also right to be looking after the economy and ensuring that, when the worst passes, Australia can commence the process of returning to normal.
In my opinion, global investment markets will settle and commence recovery when the health crisis improves (ie. the curve ‘flattens’ and infection and death rates lower). This will have a far greater impact on sharemarkets than all of the money thrown at the economy.
These are unsettling and unprecedented times. Contact us today to discuss your investments.