Arm wrestle battle between stimulus and COVID-19

There is a long-term battle being played out on the share market at the moment between the COVID-19 pandemic and its economic effects and the impressive array of stimulus being thrown at the problem.

Early on it seemed like the virus was going to win this race, with the share market falling precipitously as unemployment ballooned and businesses and households were being severely impacted.

Now the arm wrestle has started to swing back towards the stimulus packages as Australia begins to cautiously open up from its restrictions.

Markets recovering surprisingly well

The ASX 200 is now travelling up almost 26% from the lows recorded on March 23, undoing a little more than half of the damage inflicted when the COVID-19 lockdowns tipped the market off a record high and into freefall.

It is an even better story for the US S&P 500 which is up a stunning 36% since bottoming on March 23, unwinding around 70% of the fall.

Of course, that can change back in an instant and the one thing we should have learned from this pandemic is that we need to have a lot of respect for viral interlopers that are capable of causing massive and widespread economic damage – not to mention the death and sickness they bring as well.

September holds the key

In many ways we haven’t yet seen the full effects of the COVID-19 pandemic on companies and economies and there is every chance that the arm wrestle that is currently favouring the stimulus efforts may swing back in the other direction once the full effects on national budgets and company profits are made public.

That will change, most likely in September and October when the $70 billion JobKeeper scheme is due to wind up and the Jobseeker payments are reduced back to their much humbler Newstart subsistence origins.

Mortgage repayment holidays will also be coming to an end, as will the completion of the early release of superannuation scheme.

Hopefully jobs will return from hibernation

It could be that many of the 3.5 million jobs being supported by JobKeeper will be able to once again stand alone without assistance but it seems likely that the unemployment numbers will still hit double figures around then.

It is certainly going to be a tough time to be unemployed with so many people who have lost their jobs all looking at the same time as their stimulus payments dry up.

The Reserve Bank of Australia governor Dr Philip Lowe has repeatedly warned about the fiscal cliff in September and has suggested that JobKeeper might need to be extended and that other stimulus measures may need to be implemented.

“It’s very important that we do not withdraw fiscal stimulus too early,” Dr Lowe said last week.

There will also be many long-term effects from the COVID-19 lockdowns and associated economic damage.

Superannuation account will suffer

One obvious one is superannuation with a staggering 50,000 super fund members having their accounts wiped to zero as a result of the government’s early release scheme.

That number will only increase and the effects will be felt for decades to come as retirement funds are much smaller than they otherwise would have been – postponing retirements and leaving retirees with a more austere lifestyle.

In reality it will be very difficult for many of those who have tapped their superannuation to ever catch up to where they would have been, due to the effect of compounding and time on returns.

They can try to get back through salary sacrifice and other contributions but it is tough to catch up on those lost years of compounding returns – or even the recent share rally.

Overall, almost 1.4 million people have accessed up to $10,000 of their superannuation so far, with more than 463,000 of them were under the age of 30.

Household and government budgets will look terrible

Small Caps has previously covered the effects of the crisis on households and government budgets and it is also worth remembering the costs and effects on the banking system.

All of these issues have short and long term costs and they will play out over time but for now at least, the massive amount of stimulus being showered on the COVID-19 economic effects is working and in Australia at least, the direct effects of the virus appear to be waning, even though there is absolutely no room for complacency.

As for when the arm wrestle between the economic effects of COVID-19 and the various stimulus measures will be over, that depends very much on when and if a vaccine or effective treatments are found and implemented.

There is little doubt though that the effects of this crisis and the increased debt levels will still be visible in economic figures produced decades from now.

And if there is one thing this virus should have taught us, the future is inherently unknowable and at any time a new factor can emerge somewhere in the world and tip everything that is happening on its head.