Will the Market Fall Heavily after COVID Debt Bubble?

Many Australian’s are currently enjoying the benefits of the Governments COVID-19 stimulus measures, although there are just as many worrying about the debt we are creating as a nation and how we will survive this.

Australia now faces the biggest deficit since World War II

Last Thursday, Treasurer Josh Fyrdenburg revealed that Australia’s budget would blow out to $184.5 billion this financial year, making it the biggest deficit we have experienced since World War II. While increasing our national debt should be concerning to all Australian’s, we also need to look at the bigger picture and put what is now happening into context.

In 2019, Australia’s debt to GDP was 41.80 per cent and after Thursday’s announcement, this will rise even further but by how much is uncertain right now although expectations are that it will not be an alarming increase. In comparison, if we look at US debt to GDP, it is currently sitting at a massive 132.57 per cent. To see the US debt to GPD level like Australia is currently experiencing, you have go back 60 years to the 1960’s when the US debt to GPD ratio was 52.65 per cent.

Much of the growth in debt in Australian has occurred over the last decade because in 2007, at the height of the GFC bull run, the debt to GPD level was just 9.7 per cent. When you compare that to today’s level, you can start to understand why so many Australian’s are currently concerned. Stimulus packages during the GFC also saw debt levels in the US increase significantly but unlike the US, Australia has done an excellent job over the past four years in curbing its debt to GDP level, as it has been in the low 40 per cent range since 2016 and, until COVID-19, was set to fall away.

So, should we be concerned? Like so many others, I am concerned but I am not alarmed by our debt levels for two reasons. The first is that a nation’s debt is very different to household debt because unlike individuals who have set periods as to when the debt must be repaid, the nation’s debt has no set time limits. Secondly, our debt to GPD level is currently quite acceptable and, as a nation, we are much better placed than most other countries to not only handle this increased debt but also thrive over the next few years.

What were the best and worst performing sectors last week?

Information Technology was the big mover up nearly 2 per cent, while Consumer Discretionary was up over 1 per cent with the Energy sector not far behind. The worst performing sectors included Communication Services, which is down over 2 per cent while Industrials and Healthcare were both down over 1 per cent with Utilities and Consumer Staples down under 1 per cent.

Looking at the ASX top 100 stocks, the best performers were QBE up almost 11 per cent while Oz Minerals was up over 9 per cent. Tabcorp was also up over 8 per cent and Newcrest Mining was up over 5 per cent. Several stocks were up over 4 per cent for the week including IOOF, Downer EDI, Flight Centre, Goodman Group, Santos Bluescope Steel and ALS Limited.

The worst performers included Alumina, down over 7 per cent followed by Unibail-Rodamco-Westfield, which was down over 6 per cent while Insurance Australia Group and Brambles were down over 5 per cent.

What's next for the Australian share market?

Last week the All Ordinaries Index moved up to its highest level in six weeks, however, it fell away late in the week to close at 6,148 points, which is slightly below where it closed four weeks ago. Currently, the market is moving up more cautiously than confidently, which means market momentum has slowed considerably. If we look back, the market rose 42.57 per cent over 53 days from the low on 23 March to the high on 9 June. Since 9 June, however, the market has traded down 2.64 per cent over the past 33 days.

Given how the market is moving at present, investors should continue to exercise patience rather than jump in for fear of missing out (FOMO). In fact, this fear has seen many investors make unwise decisions over the past month or so because if the market does turn down, as expected, many inexperienced investors will be caught out.

While I believe there is time for the market to trade up to around 6,600 points, I still expect it will peak sometime soon. For weeks, our market has failed to trade above the high of 6,314 points set on 9 June and moving past this level will indicate whether the target of 6,600 points is achievable. If the market fails to rise above 6,314 points this week, there is a high probability it will begin to fall away very soon into the next low.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.