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Chief economist update: The All Ords' ups, downs and ups

It seemed so long ago and far away now but it was only a year ago that the All Ordinaries index broke above its all-time high recorded in 2007 before climbing to a new peak in February this year.

The mood was good: The US and China have reached a trade deal; Brexit's settled; the Fed succeeded in turning the US inverted yield curve - which presaged a recession - after it cut the fed funds rate three times (in July, September and October) while at the same time, and along with other major world central banks, offering forward guidance that monetary policy would remain accommodative going forward.

So much so, that the IMF forecasts global growth to rise from 2.9% in 2019 to 3.3% in 2020 and the World Bank  projects growth of 2.5% in 2020 from 2.4%.

What could be better for the Australian equity market? What's better was that the Reserve Bank of Australia (RBA) also lowered interest rates - it cut three times in 2019 (June, July and October) taking the official cash rate to a fresh record low of 0.75% and was expected to cut rates by at least another 25 bps in 2020.

The Morrison government's increased fiscal spending - intended to provide relief and help in the recovery of the communities and businesses devastated by the bushfires that burned Australia in late December 2019/early January 2020 and as penance for the Prime Minister's hanging loose in Hawaii while Australia burned - provided additional impetus for Australian equity market investors.

The year 2020 was gonna be a good year for equity market investors - it's gonna be a good, good year ... until COVID-19.

Efforts to contain the coronavirus pandemic have prompted governments everywhere - except Sweden - to impose social isolation and business lockdown measures, effectively freezing economic activity, resulting in almost equivalent sell-offs in the Australian equity market and in developed and emerging markets.

The All Ordinaries index dropped by 36.8% from its February 2020 peak to its March 2020 low after Australia's shutdown.

Aggressive monetary and fiscal policy responses and the gradual easing of restrictions sparked a 31.5% rally in the benchmark index form its February low, and reversing the March quarter's 24.9% loss into a 17.4% gain in the June quarter, although it's still 11.8% down this year to date.

However, recent reports of increasing cases of infection in Victoria - Australia's second biggest state - has forced the Andrews government to again lockdown 36 suburbs and other states laying out the you're not welcome mat for Victorians.

The Victorian experience brings home the risk of a second wave that threatens the RBA's recent assessment that "the economic downturn will not be severe as earlier thought".

But with both Australian monetary and fiscal authorities on the case, we'll be right mate!

Read our full COVID-19 news coverage and analysis here.

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