How can the ASX 200 soar with rising unemployment?

The S&P/ASX 200 (INDEXASX: XJO) is recovering despite the rise in unemployment. Recent measures by the government look to be restoring confidence.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The S&P/ASX 200 Index (ASX: XJO) has rallied 19% off its March lows despite rising unemployment. This has been assisted by government measures:

The list above is not exhaustive but representative of measures taken by the government and the RBA to try to cushion the economy.

Why has the government stepped in?

The COVID-19 pandemic has had a detrimental impact on the Australian economy. Unemployment is estimated to rise to 10% from 5.1% according to Treasury figures. Without the stimulus measures, unemployment would have been higher. The Treasurer said the economic shock from coronavirus is set to be far more significant than the Global Financial Crisis.

According to research firm Roy Morgan, a staggering 3.92 million Australians (27.4% of the workforce) were unemployed or under-employed and looking for more work in the second half of March.

Relationship between unemployment and the share market

The market rally is surprising to many, particularly when economic indicators, such as unemployment, are soaring. The share market is more concerned about predicting the future than it is about the present. Furthermore, the recent decline and upswing is explained by the market's ongoing re-evaluation of risk.

The bounce in the market is also in anticipation of a 'V-shaped' recovery.  While it's yet to be seen whether government stimulus will have the desired effect, it's reassuring for investors to see economic support.

Prices of shares are influenced by company earnings. While earnings have been hit hard in some sectors, other sectors have thrived on the back of the crisis with more demand.

An example of a sector hit hard by economic shocks are financial institutions such as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking GrpLtd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC). A low interest rate environment squeezes net interest margins which impact earnings significantly.

In contrast, a sector that has performed very well are ASX healthcare shares such as Ansell Limited (ASX: ANN) and Fisher & Paykel Healthcare Corp Ltd (ASX: FPH). This is on the back of increasing demand for their healthcare products.

Foolish takeaway

It appears optimism on the share market has replaced pessimism somewhat. Over the coming months, as more economic data is released, investors will have a clearer picture of any economic recovery.

Motley Fool contributor Matthew Donald owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Coronavirus News

Man with his hand on his face looking at a falling share price chart on a tablet.
Share Market News

ASX 200 stocks dive 2.4% in worst trading day since Ukraine crisis hit

It's not a good start to the week for the market.

Read more »

A woman looks nervous and uncertain holding a hand to her chin while looking at a paper cut out of a plane that she's holding in her other hand. representing the falling Air New Zealand share price today
Travel Shares

Borders just reopened so why is the Flight Centre (ASX:FLT) share price falling today?

Experts believe it may take several years for tourism levels to rebound to pre-pandemic numbers.

Read more »

A worker in hi vis gear holds his hand up saying no.
Coronavirus News

Own BHP (ASX:BHP) shares? Here's how the ASX 200 miner is battling COVID

Mining unions have not generally supported mandatory vaccinations.

Read more »

Female worker sitting desk with head in hand and looking fed up
Coronavirus News

Here's what Rio Tinto (ASX:RIO) boss says is 'causing some challenges' right now

The Omicron variant is spreading in Western Australia.

Read more »

A man wearing a mask punches the air with joy after getting a negative COVID result on a rapid antigen test.
Coronavirus News

Why are ASX COVID test shares climbing today?

COVID-19 tests are in focus again today.

Read more »

a girl stands in an apple orchard holding two red apples in raised arms with a happy, celebratory look on her face with a large smile and a pretty country background to the picture.

CBA reveals the Australian economy's leading state amid COVID surge

The states and territories have all been impacted by the pandemic.

Read more »

Rapid Antigen Test taking place.
Share Market News

Why is Ellume hitting headlines today?

Brisbane-based diagnostics developer Ellume is back in the headlines.

Read more »

A woman looks quizzical as she looks at a graph of the share market.
Share Market News

Inghams (ASX:ING) share price sinks as Omicron bites

Inghams shares are down as COVID hurts its operations.

Read more »