Can the Stock market keep rising despite weak economic fundamentals?

 The fastest stock market collapse on record in late February and early March has been followed by the fastest recovery, driven by the big 6 tech stocks: Facebook, Amazon, Apple, Alphabet (Google) Netflix & Microsoft.

The general rise in stock prices and, in particular the Nasdaq index, to an all-time high of over 10,000 has been fuelled by unprecedented levels of liquidity from central banks. For example, growth in U.S. M2, a broad measure of money supply, has been its strongest since the Federal Reserve’s records began in 1960. Furthermore, Fed Chairman Jay Powell has promised zero interest rates for the foreseeable future. Other countries, including Australia, have experienced similar phenomena.

It has to be noted, however, that bond markets aren’t buying into the optimism seen in equity markets in any way, shape or form or we would have seen rising interest rates.

For equity investors, the fear is that the recovery cannot be sustained once the market has to confront the fact that the world is dealing with the greatest pandemic in a century and probably the largest economic contraction since the great depression of the 1930s.

In the US, which drives global markets, the growing political problems for President Trump, and the prospect of a Democratic majority with the ability to make market-unfriendly policy, such as tax increases, is another headwind.

The markets are also getting nervous about the growing number of coronavirus cases worldwide and the prospect of a second wave in the U.S. and elsewhere.

So, can the stock market keep rising or at least hold current levels? We know that the fundamentals will get worse from here, but there’s excess liquidity and the lower-forever impact of interest rates is currently putting a floor under valuations. Over the next few months we’ll see if low rates and high liquidity are still enough to support markets which will need to be looking ahead to 2021 and beyond to sustain recent momentum. I see evidence of a dangerous speculative bubble in which valuations make little sense and while further price increases are quite possible in the shorter term, I have my doubts that this can be sustained.

Australian Interest Rates

Back in 2018/19 the RBA was signalling that they would raise interest rates if the unemployment rate reached 4% (effectively maximum employment), because inflation would be likely to rise unacceptably. Since then rates have fallen substantially in response to coronavirus.

The RBA is now signalling that they won’t hike rates until unemployment gets back down to around 5% – all else remaining equal. Rate rises, something we haven’t seen since November 2010 when the RBA hiked rates from 4.5% to 4.75%, seem a long way off. The RBA governor has stated that we should expect rates to stay at current levels for years.

For investors unhappy with very low Term Deposit rates, the bad news is that this is unlikely to change. The good news for borrowers is that historically low mortgage rates are likely to persist for a number of years.

 End of Financial Year – Super Contributions & Pension Payments

As we are approaching the end of this financial year, prompt action is needed by anyone who

  • needs to make a pension payment to meet the minimum payment obligation for this financial year;
  • wishes to make a tax-deductible Super contribution within their $25,000 cap; or
  • wishes to make a non-concessional contribution within their $100,000 cap.

If you are unsure as to whether you need to do anything please contact us promptly as cut off dates are rapidly approaching.

 Superannuation – Contribution Flexibility for older Australians

As part of its initiative to provide greater flexibility for older Australians, the Federal Government announced proposed changes to super contributions for older Australians in the 2019/20 budget.

These announcements included:

  • increasing, from 65 to 67, the age at which the work test starts to apply for voluntary contributions;
  • increasing, from 65 to 67, the age at which the non-concessional ‘bring forward’ option cuts out; and
  • increasing the age limit for spouse contributions from 69 to 74.

The relevant Superannuation legislation passed through parliament recently, meaning only individuals aged between 67 and 74 are required to satisfy the work test before they can make contributions to their super funds from the start of the new financial year.

Work Test

The work test will no longer need to be met to make voluntary contributions to superannuation from 1 July 2020 for those aged 65 and 66. This means the work test requirements will align with Age Pension age which will be 67 from 1 July 2023.

The removal of the work test provides increased opportunity to:

  • make non-concessional contributions
  • make concessional contributions including catch-up contributions
  • implement a recontribution strategy
  • manage tax, including capital gains tax
  • claim the spouse contribution tax offset or co-contributions (if eligible)
  • make contributions under the small business CGT concessions, and
  • transfer foreign superannuation into an Australian superannuation account.

 Spouse contributions

The age limit for spouse contributions will increase to 74. Currently, spouse contributions can only be made if the receiving spouse is under age 70. Additional flexibility will be provided by the removal of the work test for those aged 65 and 66. From age 67 to 74, the work test would need to be satisfied by the receiving spouse.

Making spouse contributions is a simple strategy that enables that spouse’s superannuation to be boosted. This may be used as a means of equalising the superannuation interests of both members of the couple. It may also entitle the contributing spouse access to the spouse contribution tax offset. There is no change to other criteria, such as the total superannuation balance, which will limit the ability to make non-concessional contributions for some.

 Changes to Minimum Pensions for next Financial Year – 2020/21

As you are likely aware, Superannuation law requires that all pensions paid from a Superannuation account meet age-based minimums. These are adjusted each year based on the account balance as of 30 June. These minimums are not necessarily relevant if you are taking more than what is specified.

As a result of coronavirus and its impact on the economy and investment markets, the Federal Government announced a temporary 50% reduction in the minimum drawdown requirements for the 2019-20 and 2020-21 financial years. This measure is designed to assist retirees by reducing their need to sell investments to meet minimum drawdown requirements when market prices are under pressure.

The reduced minimums are now available to everyone with an account-based pension, allocated pension, transition to retirement pension and term-allocated pension (growth pension).

Age at start of pension and each 1 July(current) minimum percentage of account balance(new) reduced minimum percentage of account balance
Under 6542
65 to 7452.5
75 to 7963
80 to 8473.5
85 to 8994.5
90 to 94115.5
95 or more147

 

Colonial First State, MLC and some other pension providers will be automatically applying the new reduced minimum rates to all pension clients who have previously elected to be on the minimum drawdown from 1 July 2020.

Please note, if you are not receiving the minimum allowable pension this will not impact you in any way. Also, if you are receiving the minimum pension but would like to receive more than the reduced minimum that’s fine, just contact us and we’ll arrange to have your pension set at the level you need.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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