The S&P/ASX 200 Index (ASX: XJO) is today (at the time of writing anyway) sitting at 6,117.2 points, up 0.95% so far in today's trading.
Since bottoming out at 4,546 points on 23 March, the ASX 200 is now up more than 34% off those lows where it sits today. For the year so far, it remains down 8.6%. The last time the ASX 200 was at these levels, it was back in February 2019 — a time that now seems a blissful, pandemic-free utopia in hindsight.
So what exactly is the ASX 200 telling us? Markets are supposed to be forward-looking mechanisms, so what kind of future is being priced in today?
I think this is a pertinent question.
Yesterday, we found out that the Australian economy just had its worst quarter (ending 30 June) since records began. Gross domestic product (GDP) slumped by 7% in just the quarter. We are now firmly in recession for the first time in three decades. Notes from this month's Reserve Bank of Australia (RBA) meeting suggest that it will take years for the economy to return to 'normal'. Unemployment is expected to be high for years, and inflation low. That's partly why interest rates are at a record low of 0.25% (which is virtually zero).
And yet, the share market is apparently telling us that things are just as good as they were in February last year.
A strange new world for the ASX 200 and US markets
Over in the United States, things are even stranger. The American economy is unquestionably in a worse state than Australia's. According to reporting in the Australian Financial Review (AFR), US GDP fell by a painful 9.1% in the quarter ending June 30. And the previous quarterly result (ending March 31) was also worse than Australia's, falling by 1.3% against Australia's 0.3%.
And yet the US markets are doing even better than Australia's. Both of the US's flagship market indices — the Nasdaq Composite and the S&P 500 — are at record highs as of today. As in, they-have-never-been-higher-in-history record highs.
So what can we assume the markets are telling us? Well, only one thing really, in my view. That this economic crisis will be either V-shaped, or else a very steep U-shaped one. That things will return to normal very soon. That there's nothing to worry about with these record-breaking GDP numbers. That the monetary stimulus from central banks around the world is enough to mask anything the world throws at it.
I don't mean to be a pessimist, but I don't buy it.
I'm not selling everything and going to cash of course. But I am looking hard at my portfolio and weeding out investments that I don't think are being priced fairly. I'm also building up a cash buffer, in case the markets do realise that things aren't back to February 2019, that central banks can't solve every problem under the sun. And if I'm wrong, hey, I'm still mostly invested in (I hope) good quality shares.
