August 6, 2020 by Dymphna

Relax. It’s not as bad as we thought

The herd is getting nervous, but some data is better than we thought.

What if things aren’t as bad as we thought?

As investors there’s an idea that we need to be really alive to. That’s the idea of “recency bias”.

The recency bias is a tendency all humans have to put more weight on the most recent evidence.

This is one of the key reasons why markets can get so irrational. When things go bad for a week or two, we extrapolate out on that, and think that the outlook is going to be terrible forever.

So with Victoria in hard lockdown and Queensland announcing that its closing its borders again, it’s easy to think that it’s all gone to crap.

And look, none of this is good news. Absolutely not. We’re not going in the right direction. But we have to be careful to not over-extrapolate recent trends.

Things might not be as bad as we think they are.

For example, I recently got an industry report from CBA, which reckons that households are actually in a better financial position than they were pre-Covid.

I had to do a double-take at my computer. Better?!?

But that’s what they reckon. On the back of government support programs and the early access to super, households are in a stronger financial position.

The income of the average household rose by 4.2% over the year to Q2 20, up from 2.4% over the previous year. Salaries have fallen due to coronavirus job losses. But investment income and government benefits have increased sharply. Investment income is capturing the early withdrawal of super which is part of the COVID-19 response

That investment income is a doozy, but remember it’s all about the super withdrawal.

Still, in aggregate and on average, households are substantially better off.

And at the same time, they’re spending less. Spending has fallen by around 9% over the year to Q2 2020.

So if they’re earning more and spending less, that must mean that households are saving more. That’s a good thing. That’s shoring up their long-term financial position.

Interestingly, households have taken that money and made a substantial pivot into equities.

It’s not clear exactly what they’re attracted to here. Is it the way so many analysts are calling it a bubble? Is it the worst outlook for corporate profits in a generation? Is it the complete inability to do anything with a share once you’ve bought it?

I’m mucking around. But I am a little concerned about how many people seem to be piling into shares without really understanding what they’re doing.

Anyway, the long story short is that households are strengthening their financial position. Income is up and spending is down, and their savings buffers are increasing.

Now obviously, this is largely contingent on the government support packages. But that’s what they’re there for. This is exactly what they were designed to do.

And so look, I just wanted to throw that in the mix because I know it’s been a rough couple of weeks.

It’s easy to get the impression that the wheels are coming off.

But take a longer view. There’s a lot that’s going right. There’s a lot that’s going better than expected.

Don’t follow the herd over the pessimism cliff.