Why is the share market at an all time high

Why is the share market at an all-time high?

6 reasons why, and can it go higher?

The New Zealand share market, based on the widely-tracked NZX 50 index, is at a new high, passing the previous record set shortly before the Covid-inspired crash.

These ‘new record high’ headlines might cause head-scratching, as we are simultaneously being told we’re in the middle of a major economic crisis, which will probably see widespread job losses and business failures continue into 2021.

There are several reasons for this difference, which in many cases are the same reasons that NZ house prices are defying Covid. The top six reasons for the disconnect between the share market and the real world are:

1. The outlook isn’t that bad

Firstly, the overall economic outlook doesn’t look as bad as it did back during the ‘great lockdown’ in March and April, when share prices plunged. The worst-case scenarios we were hearing about during that period now look too gloomy.

The unemployment rate is still likely to go higher, but not nearly as high as some predictions had suggested, while any negative impact on the housing market looks set to be much more modest.

In short, things are going to be tough for the next year or two, but not as tough as share prices were reflecting at the lows of late March, when prices were down 30 per cent from their peak a month earlier.

2. Low interest rates – especially on bank savings and term deposits

With record low interest rates and more money being printed every day in both NZ and Australia, all that money has got to find a home somewhere. Many experts believe this should keep the markets running hot for many years to come.

3. Taxpayer to the rescue

Another aspect of the rebound can be explained by the massive response we’ve seen from our central bank and government:

  • The Reserve Bank of NZ has thrown the kitchen sink at this situation, and the bathtub is coming next. Short term interest rates are slashed to rock bottom, while the quantitative easing (“money printing”) programme has ensured longer-term interest rates remain equally subdued. This approach won’t change anytime soon.
  • The government, on behalf of future taxpayers, are backing this up with NZ’s largest ever accumulation of borrowing. This is flowing directly or indirectly to many Kiwi households and businesses in the form of wage subsidy schemes, increased benefits, bailouts of some businesses and sectors of the economy, and the recently extended mortgage holiday scheme.

These measures either help businesses directly, such as a wage subsidy to help pay staff and lower borrowing costs, or indirectly, such as by keeping money in people’s pockets so they can keep spending money on goods and services that businesses offer.

4. Sometimes, life isn’t fair

As difficult as it might be to admit, not everyone is doing it tough.

Through the lockdowns in NZ, and in many other countries, many office-based employees in resilient or un-impacted industries have simply kept working uninterrupted from home. In many cases, these people have put off spending on hobbies and overseas travel and are investing their savings instead – which keeps share prices up. The same can be said for major institutions and charities: they’re staying invested or are investing more.

Also, while some companies have gone bust and industries have suffered, many businesses and industries have thrived through the downturn. Investors have flocked to buy shares in these sorts of companies! – see points #5 and #6…

Why the markets are at an all time high - balanced

5. The stock market is lopsided

The bigger companies are over-represented in NZ’s small share market. When the heavyweights move up or down, they push the index in that same direction, regardless of how the others are doing.

For example, Fisher & Paykel Healthcare, a2 Milk, Spark and Chorus have all performed extremely well this year. These companies alone account for more than a third of the NZX 50 index, and their strong gains have held it up. If we took these four companies out of the mix, the NZX 50 would still be about eight per cent below its high.

Two thirds of the companies in the NZX 50 are still down since 1 January 2020, and the average share price change for all 50 is a decline of close to ten per cent, which makes for a slightly different story.

Interestingly, this is much the same as the US investment markets, where a few huge global corporations dominate. In fact, five technology-focussed firms make up 20 percent of the total value of the top 500 US companies. The upturn has occurred in much the same way in this market too – a few large players have led the recovery in share prices.

6. The stock market isn’t the economy

The share market is far from a perfect reflection of the economy.

Some of the industries that have been impacted most by recent events are hospitality, tourism, education, and retail (shops).

These industries aren’t well-represented on the NZ share market. The NZX is dominated by more resilient industries that have faced much less disruption, such as electricity companies, property and infrastructure, healthcare, and agricultural businesses.

Finally, it’s important to remember that the value of a business is a function of all of its future growth and profits, not simply those over the next one to two years. Even though the immediate future will be challenging, as we look ahead to the next five, 10, or 20 years, many of the quality companies in the NZ and world markets still have excellent prospects.

The bottom line

To recap, here are the top six reasons why the share market is still going strong:

1. The outlook isn’t that bad

2. Low interest rates – especially on bank savings and term deposits

3. Taxpayer to the rescue

4. Sometimes, life isn’t fair

5. The stock market is lopsided

6. The stock market isn’t the economy

These same reasons could keep the share markets going for years to come, even if they do stay volatile.

Related news: Why Covid hasn’t crushed the NZ housing market