Can government stimulus save the ASX?

Can the government's stimulus packages save the ASX 200 from further falls?

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It's safe to say that markets have been a lot calmer since the government started flagging additional and ongoing stimulus for struggling Aussie families and businesses last week.

Announced on Monday, there are now payments of $1,500 a fortnight per worker for businesses that keep employees on the books and on the payroll during this coronavirus crisis.

This comes on top of an increased JobSeeker payment, additional $750 cheques for existing welfare recipients and billions in tax relief for all businesses that have been previously announced (amongst other things).

So does all this stimulus have the capacity to save the ASX from any further falls?

Well, according to reporting in the Australian Financial Review (AFR), the total value of the government's stimulus packages now stands at least $214 billion (11% of GDP). If you throw in the $105 billion that the Reserve Bank of Australia (RBA) has been deploying into the financial system, the total comes out at $320 billion (or 16.4% of GDP).

For some perspective, the total market capitalisation of the entire ASX is around $2.03 trillion (as of February 29).

So I think it's worth pointing out what actually makes the share market tick.

ASX companies are normally priced on both earnings (or profits) and what investors are willing to pay for those earnings.

In a bear market (like the one we're in), investors are usually more reluctant to pay higher prices for a company's earnings than during bull markets. So that puts a dampener on things already. But if a company's earnings fall, it also drags down that company's share price, both through losing profitability and through further depression of investor sentiment.

How does this relate to the stimulus?

We will only know exactly how the stimulus will affect the ASX when companies start releasing their earnings for the period affected by the coronavirus shutdowns (however long it lasts). Only then will we start to get an idea of which companies have been able to keep trading effectively, and where individuals and businesses are spending their stimulus dollars.

Until this happens, the stimulus measures are at least calming the stock markets (for the time being anyway). Sentiment does go a long way in determining what the stock market does. But sentiment only lasts until data takes its place. So we'll have to wait and see on that front.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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