Market draws breath after hard run

History says after a big fall there is often a rally, which gives way to another fall before climbing again. Picture: AAP

Australian stock prices have fallen 7 per cent from Tuesday’s high, but this followed a 35 per cent rally from March 23 lows, so the drop was long-overdue.

The reason for the 3 per cent fall on Friday is obviously Wall Street which is now worried about COVID-19 again after US Federal Reserve chair Jerome Powell issued a bearish view on the US economy on Thursday.

Both the US and Australian markets had rallied and pundits had questioned whether it had gone too hard in the face of a gloomy economic outlook and continued problems with the coronavirus with now more than two million cases in the US and over 111,000 deaths.

The rate of infections in big cities like New York might be slowing, but as the country rushes to open up, states such as the Carolinas have seen climbing rates of infection.

The S&P/ASX 200 index opened at 6745 points and rallied to a high of 7162 points on February 20 before the virus news hit.

The government imposed lockdown, sending tourism, hospitality and education into freefall. It also sent stock prices down to a March 23 low of 4546 points before rallying until Tuesday.

Last weekend saw better-than-expected jobs numbers from the US, which temporarily buoyed its markets, but the reality was, even at a lower unemployment rate of 13.3 per cent the US jobless number was the second highest after April since World War II.

In other words, it was still grim.

This reality applies in Australia, even if the virus is more under control.

The Australian market tends to follow US markets.

History says after a big fall there is often a rally, which gives way to another fall before climbing again.

That is where we stand today, which means there is no cause for panic, just acceptance that the rally was too strong and the market is catching up to reality.