Should be you be bullish or bearish on the share market right now?
The S&P/ASX 200 Index (ASX: XJO) has been steadily climbing over the past couple of weeks after hitting a low on 23 March 2020.
This situation is unprecedented in many ways. No-one has invested during a global pandemic before. The share market hasn't fallen so heavily in such a short amount of time for decades. Almost every country was accessible to each other by plane and now there is barely any international travel.
Remember that the share market is different to the economy
The share market is forward-looking, whereas the economy doesn't respond as quickly. The GDP and unemployment numbers are old news by the time they're released – particularly in horrible times like this.
If you invested during the GFC based on the US unemployment rate hitting its worst point, you'd have missed the bottom of the share market declines by about half a year.
There is undoubtedly going to be a lot of economic pain (as well as many lives lost) over the next six to nine months, maybe longer.
But the share market has already taken a lot of that into account. It's why the ASX 200 is down 26.4% since the beginning of the declines. It's why the share prices of banks like Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are close to GFC low prices. It's why APRA has asked banks and insurers to materially reduce their dividends this year.
However, there is still positivity about the situation hopefully improving – we have seen several days of the share market rising strongly on some days in the past couple of weeks.
Interest rates are incredibly low
When it comes to investing and valuations, interest rates are meant to act like gravity. The lower the interest rate the higher the valuation can go because the return offered by 'safe' assets is so low.
Australia's official interest rate is now 0.25%. Cash and bonds aren't good long-term investments with that kind of yield.
When the worst of the coronavirus is over I think there is a fair chance the share market may recover quite quickly because of how cheap share prices will look right now.
Bull or bear?
I am bullish about the long-term future of the share market. I don't know whether it will take three months, six months or over a year for the ASX 200 to see the 6,000 level again. But each time a crash has happened in history, eventually it recovers and reaches new heights.
The situation is certainly concerning in the US. There could be a lot more short-term pain to come. Getting life back to normal will also be a very big task for western nations. And all this debt isn't just going to disappear any time soon.
I believe that there are plenty of ASX shares that will continue to keep delivering good returns for shareholders in the coming years. You just have to find the right ones that are at good prices.
