Comparing the impact of COVID-19 to other share market events
The first half of 2020 saw large falls in share markets, as Governments across the world imposed restrictions on travel and implemented social distancing measures to help contain the spread of COVID-19. These measures resulted in greatly reduced business activity and led to a spike in unemployment. While some of these measures are beginning to be relaxed in most of Australia, it is uncertain how long they will be in place and what the longer-term impact will be on the Australian and global economies.
As the full economic impact of the virus is yet to be realised, it is too early to make full comparisons between the COVID-19 experience and other share market falls such as the Global Financial Crisis (GFC) or the dot-com bubble. However, even at this early stage there are some clear factors that differentiate what we're experiencing now from these previous periods.
The dot-com bubble began in the late 1990s as a result of investors becoming excessively optimistic about the outlook for technology shares. Inevitably, in September 2000 the bubble burst, leading to a widespread and lengthy sell off in global share markets. The GFC was primarily a result of excessive risk taking by investors and banks, particularly in relation to the US housing market. When the housing market bubble burst, many people were left with too much debt that they couldn’t afford to repay, and a house that was worth a fraction of what it once was. As people began to default on their mortgages, the financial system suffered heavy losses and some US banks once believed to be 'too big to fail' started to collapse. This started a chain reaction that crippled the financial system in the US and across the world.
As with many of the major share market falls in the past, the GFC and dot-com bubble began with the bursting of a market bubble. COVID-19 however, began as a health crisis that led to Governments imposing extreme restrictions in full knowledge that it would result in an abrupt, short-term halt in economic activity. During the current crisis, governments across the world have been willing to provide significant financial stimulus packages, with the United States and Australian Governments both announcing packages much greater than those announced during the GFC. These packages are intended to help prop up these economies while virus containment measures materially reduce economic activity.
The fall in share markets as a result of COVID-19 has also been different to the falls experienced in either the GFC or dot-com bubble in terms of how far the US equity market fell from its peak, how long the market took to reach its lowest point, and how long the share market took to recover to its previous highs. Following the bursting of the dot-com bubble, the S&P 500 index took around two years to fall by around 50% and then took an additional five years to recover to its previous highs. This is similar to the GFC which saw the S&P 500 index fall more than 50% over an 18-month period and four years to recover to its pre-GFC highs. In contrast, COVID-19 saw the S&P 500 index fall by approximately 35% from its late-February all time high over the course of only one month, followed by a strong recovery.
Despite the recent signs of a share market recovery, the economic impact from COVID-19 is likely to be felt for some time. Periods of negative returns are expected to occur from time to time and Cbus' investment options have been constructed to reduce the impact that one asset class such as shares has on members’ overall returns by making investments across different asset classes. This approach has allowed the Growth (Cbus MySuper) option to achieve a positive 12-month return as at 30 June 2020 despite the impact of COVID-19.
If you have any questions about your Cbus account, please call Cbus Advice Services on 1300 361 784 and we will assist you at no additional cost. Please note that we are currently experiencing an increased volume of calls.
This information is about Cbus. You should read the relevant Cbus Product Disclosure Statement to decide if Cbus is right for you. Call 1300 361 784 or visit cbussuper.com.au for a copy. Past performance is not a reliable indicator of future performance.