Many people have asked why share markets in Australia and overseas rose strongly in the June Quarter and why they are continuing to creep slowly higher.
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During this period the COVID-19 virus has continued to spread in Europe, the US and around the world.
There were severe lockdowns in place in many countries during the Quarter.
While many Asian and European countries were able to control the virus and restrict its spread, others like the US and Brazil were not.
Even now thousands of people are dying every day around the world.
Surely this should be causing share markets to fall or at the very least not rise?
Share markets are driven by economic influences. Investors buy and sell shares based on their expectations of future company profits and dividends.
This is the clue to recent market behaviour. Share markets do not care about the medical problem. They do not care about the number of infections, hospitalisations or even deaths. They simply care about what effects our responses to the medical threat will have on the economy and company profits.
If profits are likely to increase markets will rise. If they are likely to decrease markets will fall.
It wasn't the medical threat that caused the savage fall in share markets in March. It was the fear of the effects the resulting lockdowns and restrictions would have on the global economy and company profits.
Now when there is talk of reimposition of lockdowns and return to more severe restrictions, share markets fall. When there is reassurance from leaders such as US President Trump that there won't be more lockdowns, markets rise.
What about the recent outbreak of infections in Victoria? Won't that slow the Australian economy?
The Victorian second wave outbreak accelerated out of control in early July when the All Ordinaries Index was about 6150 points. At the time of writing it is very close to that level. So the Victorian outbreak has worried investors enough to ensure the Australian share market has not risen further. In that time the US share market, which we often follow, has continued to rise slowly.
Leaders around the world have had to weigh up how much to sacrifice the economy to control the virus.
Most have been prepared to order an initial severe lockdown at great cost to their economies. However most have also shown reluctance to impose a second serious lockdown.
They worry that such a move would be devastating for their economies, especially jobs.
Share investors are observing this reluctance, and the massive government and central bank stimulus measures, and expecting a brighter economic future.
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