Is the share rally sustainable?

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June 11 2020
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Following a volatile three months, the ASX 200 has regained some of its COVID-19 losses, rising to over 6,000 points, while the NASDAQ 100 has reached a new high, causing investors to wonder if the rally is sustainable.

According to chief economist at AMP Capital Dr Shane Oliver, shares could remain volatile over the short term, with investors who are taking a longer-term view being encouraged to average into the market.

Dr Oliver highlighted how shares have climbed the “wall of worry” and are rallying with the threat of COVID-19 and civil unrest not enough to stop the US markets leading the world in growth.

“But I have seen this happen before and it reminds me of the quotation from the investor Sir John Templeton, ‘Bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria’, as this rally has occurred against a lot of pessimism, with shares climbing a wall of worry.

“But as the quote reminds us, that’s what they often do. The plunge in shares into March led the coronavirus hit to activity and fear of recession on the way down and in the process surprised many at the severity of the fall and now it’s led on the way up despite still lots of worries,” Dr Oliver said.

The economist explained that key signs markets had bottomed out in April, as well as optimism as the economy reopened and further government support, has led to investors being bullish on markets.

However, that does not mean it’s smooth sailing for investors, with the markets likely to remain volatile.

“After huge rallies, most shares are technically overbought, which could mean we see a correction over the next few months. But many shares in many sharemarkets are at overbought extremes often seen in the aftermath of major bear market lows, and this augurs well for returns on a 6-12 basis,” Dr Oliver said.

He also highlighted three risks moving forward, including a second COVID-19 wave, collateral damage from shutdowns, and risks around the US election, which investors need to be mindful of.

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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