The ASX200 has reduced by 4.8% over two consecutive days, with 3.2% being the decline in yesterday’s (Tuesday’s) trading.
Why has this happened?
Company tax rates in the US have reduced from 35% to 21% with the passing of the “Tax Cuts and Jobs Act” in December 2017. The purpose of the tax cut was to increase capital investment and increase jobs, both of which would help drive the US economy.
Lower company tax means increased cash flows. A positive revaluation of companies in the US took place based on increased cash flows, and with this the US share market rose by around 13% from November 2017 to the end of January 2018.
The recent sell off means that the US market has shed around 6.43% over the last three trading days (to the close this morning) but, it’s still up by around 40% over the last 2 years.
The ASX200 has been dragged down with the US market, as were most markets around the world.
The good news is that the ASX is still showing a positive return from 1 October 2017 to 6 Feb 2018.
What does this mean for the future?
We think this is the beginning of a volatile year. Global share markets are nearing the end of long period of growth and any negative news will likely cause a sell off. This should present buying opportunities from mispricing of companies.
Over the longer term it looks like developed economies have moved into a stable growth at 2.5%-2.8%. A stable economic environment is like a ship at sea, rough waters and storms will focus the crew on the matter at hand. Calm waters and smooth sailing allows the crew to focus on their destination.
What should you do?
You should always focus on your destination. Short term volatility shouldn’t detract from the longer term objectives.
Trying to time the top and bottom of markets just doesn’t work. Investing in good quality assets over the longer term does work. So, sitting tight and watching the ups and downs is generally the best solution at this time.
If you have any questions or would like more information please feel free to contact us. You can call us on 1300 300 844 or email firstname.lastname@example.org.