The S&P/ASX 200 Index (ASX: XJO) is having a top day today. On the surface, the 0.88% gain the ASX 200 has so far added today (at the time of writing) doesn’t seem that special. But consider this: with this rise, the ASX 200 is sitting at 6,164.10 points, its highest level since early March. Between 23 March and 9 June, the index rose around 35% off of its low. But since then (over a period of 2 months), the ASX 200 has essentially been stuck in a rut around the 6,000 point mark.
Just take a look at the chart below for some context:
See what I mean?
And yet today, the rut has seemingly been broken. So is the ASX 200 about to take off once again? Remember, although investors have enjoyed some solid gains since March, the ASX 200 is still down around 14% from the highs we saw back in February.
Why are ASX 200 shares surging?
I think there are 2 reasons why ASX shares are moving higher this week (so far anyway).
Firstly, commodity prices have been pushing higher in recent weeks. We have seen iron ore holding around US$117 a tonne, as well as gold making new record highs above US$2,000 an ounce. Some of the ASX 200’s largest holdings are iron ore miners like BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG). The ASX’s largest gold miner Newcrest Mining Limited (ASX: NCM) is no minnow either at a near-$30 billion market capitalisation. These companies are all at or near multi-year highs today, which has helped push the index higher.
Secondly, investors now have increased confidence over the government backstop over the economy. The federal government has confirmed subsidies like JobKeeper and the coronavirus supplement are sticking around until at least the end of the year (March 2021 in JobKeeper’s case). Right now, I think it’s fair to say that these programs are holding the economy up, and their previously-scheduled September end date was a concern for many investors. Knowing this safety net will remain in place for at least the rest of the year is helping to boost investors’ confidence, in my view.
Where to from here?
Perhaps the ASX 200 pushes even higher from here, reclaiming the 7,000 point threshold we saw at the start of the year. Perhaps the market retreats tomorrow back into its 6,000 point rut. Frankly, I, nor anyone else, has no idea of what will happen next. Here’s what we do know though. The coronavirus crisis, unfortunately, isn’t going away anytime soon. In fact, it may well get worse before it gets better (fingers crossed for the negative).
I see a lot of downside risk right now, and not much to make me confident in a huge climb higher. I’m not selling shares of my favourite companies, mind you. But I am trying to maximise my cash position all the same.
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Motley Fool contributor Sebastian Bowen owns shares of Newcrest Mining Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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.
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