How can the ASX 200 soar with rising unemployment?

The S&P/ASX 200 Index (ASX: XJO) has rallied 19% off its March lows despite rising unemployment. This has been assisted by government measures:

• $130 billion JobKeeper payment to eligible businesses and employees
• Record low interest rates set by the Reserve Bank of Australia (RBA) and quantitative easing
• Cash flow boosts to eligible businesses
• Increase in payments to eligible welfare recipients
• Early access to superannuation for eligible citizens

The list above is not exhaustive but representative of measures taken by the government and the RBA to try to cushion the economy.

Why has the government stepped in?

The COVID-19 pandemic has had a detrimental impact on the Australian economy. Unemployment is estimated to rise to 10% from 5.1% according to Treasury figures. Without the stimulus measures, unemployment would have been higher. The Treasurer said the economic shock from coronavirus is set to be far more significant than the Global Financial Crisis.

According to research firm Roy Morgan, a staggering 3.92 million Australians (27.4% of the workforce) were unemployed or under-employed and looking for more work in the second half of March.

Relationship between unemployment and the share market

The market rally is surprising to many, particularly when economic indicators, such as unemployment, are soaring. The share market is more concerned about predicting the future than it is about the present. Furthermore, the recent decline and upswing is explained by the market’s ongoing re-evaluation of risk.

The bounce in the market is also in anticipation of a ‘V-shaped’ recovery.  While it’s yet to be seen whether government stimulus will have the desired effect, it’s reassuring for investors to see economic support.

Prices of shares are influenced by company earnings. While earnings have been hit hard in some sectors, other sectors have thrived on the back of the crisis with more demand.

An example of a sector hit hard by economic shocks are financial institutions such as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking GrpLtd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC). A low interest rate environment squeezes net interest margins which impact earnings significantly.

In contrast, a sector that has performed very well are ASX healthcare shares such as Ansell Limited (ASX: ANN) and Fisher & Paykel Healthcare Corp Ltd (ASX: FPH). This is on the back of increasing demand for their healthcare products.

Foolish takeaway

It appears optimism on the share market has replaced pessimism somewhat. Over the coming months, as more economic data is released, investors will have a clearer picture of any economic recovery.

More reading

• ASX 200 down 0.9%: CBA reveals $1.5bn COVID19 provision & gold miners charge higher
• Dividends are drying up – but not for these ASX shares
• Why CBA, CSR, Fortescue, & Northern Star shares are pushing higher
• Safe dividend stocks to buy today for the COVID-19 world
• 2 quality ASX shares to buy for long-term growth

Motley Fool contributor Matthew Donald owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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