The recovery in the Australian equity market from the lows in March has left some investors perplexed. How can equity markets be rising when the real economy has sustained so much damage? The answer, of course, is found in the unprecedented monetary and fiscal stimulus that has deployed since the crisis took hold, and coupled with ultra-low interest rates, has acted as a powerful technical driver of prices for risk assets like equities. Looking back to some of the most violent sell-offs in Australian equity market history - 1987 and 2009 - shows that the rally seen in the equity market in 2020 surpasses both episodes in strength and speed.
Going forward, this is a pivotal time for investors. After a 35% rally off the low, the question remains how damaging Covid-19 has been to the economy, businesses, and labour markets. After such a rapid recovery, the strength of the market rebound from the Covid-19 crash in the second quarter of 2020 will be hard to match in the third.
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