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The stock market is a ‘sure bet’ now. Here's why

David Taylor
·Contributing Editor
·5-min read
A man walks by the New York Stock Exchange (NYSE) on November 4, 2020 in New York.
A man walks by the New York Stock Exchange (NYSE) on November 4, 2020 in New York. (Photo by KENA BETANCUR/AFP via Getty Images)

People ask the question: what does the US election outcome mean for Australian stocks?

The simple fact is that, over the medium to longer-term, it means very little.

Yes, in the lead-up to the election, a Trump presidency was seen as risky for stocks given his propensity to engage negatively with China – and the big market falls that tough talk generated.

But Joe Biden also presented a number of radical economic reforms (like repealing Trump’s tax cuts) that also had the potential to throw markets into a spin.

However, it looks like Congress will remain gridlocked. So the thinking is that Joe Biden will have trouble getting any major policy through Congress.

Financial markets are viewing the state of play now as a ‘goldilocks’ outcome. The uncertainty of Trump has gone, there won’t be any tax hikes, and trillions of stimulus will likely be available before Christmas.

That’s all nice, but markets want more, and they’ll likely get it too.

Here’s what really matters

It’s record low interest rates that are really supporting both the Australian and global markets right now.

This is the narrative that’s run across developed economies for over a decade now. Interest rates approaching zero, or going negative in some cases, makes investing in the share and property markets very attractive.

And there’s more to come.

Former European Central Bank president Mario Draghi famously said the bank would do “whatever it takes” to rescue the eurozone from the brink.

Reserve Bank governor Philip Lowe drew on that at the last board meeting by saying the RBA would do “what it can”.

We know interest rates are not going to go northwards for at least 3 years. So, from a share and property markets standpoint, there’s going to be policy support as far as the eye can see.

But don’t be tricked into thinking investing is now easy

While the overall market is being supported, this doesn’t mean that all you have to do is throw money at the stock market and look the other way.

Stock market commentator Henry Jennings said it well recently when he remarked that ‘gone are the days’ when you could retire on bank dividends.

He’s right.

The market’s pillar stocks like banks and miners all have risks attached to them (miners rely on Australia/China relations and the banks are at the mercy of coronavirus) and there’s no getting away from that.

For example, Prime Minister Scott Morrison has vowed Joe Biden's election to the United States presidency will not change Australia's approach to climate change policies, including setting a net-zero emissions target.

The Federal Government has also refused to commit to a similar net-zero emissions target, despite Morrison describing it as "achievable".

And the banks, during the latest reporting season, pushed billions of dollars aside to sandbag their bottom lines from increasing mortgage stress.

If you’re investing in the stock market, you’ll need to find companies that are generating earnings from areas of the economy that are not too affected by pandemics or major government policy.

It’s all about returns

So investing now is about finding what level of risk you're comfortable with, and then aiming for the highest returns you can find.

The “rate of return” of an asset is normally expressed as a percentage return and tells you how fast your money is growing.

The rate of return on your money in the bank will net you a slightly positive or slightly negative figure (depending on the inflation rate and fees and charges). AMP Capital describes the return on bank deposits as “very poor”.

The rate of return on shares right now – in a well-diversified portfolio – is roughly 5 per cent, or “modest” in investor speak. But that’s sort of meaningless at the minute.

That’s because the market is still relatively volatile and investors can be easily burned.

However, there are still opportunities to make enormous profits. US tech stocks, for example, have had huge gains in overnight trading in recent weeks.

So, despite the global financial crisis and the COVID economic crisis, it’s still possible to make big money on the stock market.

The reality is that companies with solid fundamentals (good balance sheets) continue to grow. But the other crucial reason is that the share market itself has become, relatively speaking, a far more attractive place to plant your money.

The trend is your friend

Another guarantee in coming weeks and months is that the share market will be volatile.

That’s partly because Donald Trump still hasn’t left the Oval Office, but coronavirus also remains a constant threat to company earnings.

The property market is a slightly different story. A reduction in migration and higher unemployment will likely keep a cap on prices, but the property market is likely to be far less volatile than the share market.

If you’re in it for the long haul, sit tight. The market will push higher.

If you’re navigating the market day to day, it’s important to keep across the news daily.

A colleague of mine recently invested in a company that makes rockets. Personally, I can’t think of a better way to boost your return. You just have to be prepared for some fireworks.

@DaveTaylorNews