Share Market Volatility – where to from here?


Share Market Volatility – where to from here?

Global markets are going up and down like a yo yo.

What happened overnight?

Overnight the US markets rebounded, as did the FTSE (London) and the DAX (German). The graph below shows overnight trading, including the ASX / SPI 200, which is an ASX futures index. This is a rough guide as to where the ASX will head today, which looks to be positive.

What caused the sell off this week?

There have been a few things that have created volatility.

1. US Federal Reserve increasing interest rates:

The Federal Reserve is the US equivalent to the Reserve Bank of Australia (RBA). The US is going through a process of ‘normalising’ interest rates, and as the graph below shows, has moved the base rate from 0.25% in late 2015 to 2.25% last week. It might not seem like much, but if you’re a big company with big debt listed on the US stock exchange, an increase of 2.00% increases your interest cost and potentially reduces profit and hinders growth. Higher interest rates mean less profit and growth, and a reducing value of that company on the stock market.

2. US / China Trade war:

The Trump administration is putting pressure on China to be better trade partners. President Trump has accused the Chinese of stealing intellectual property of US businesses manufacturing in China, then selling the same product back to the US at a discount price, basically taking the market away from the US company.

The trade tariffs will have the effect of increasing the cost of goods for US consumers, which means cost of living increases, inflation and a possible slowdown in consumer spending. Link this with increase interest rates and you have companies that have higher costs and lower sales.

The trade war could also affect China’s growth. The graph below shows China’s growth rate since 1990. As you can see, the right hand side of the graph shows growth tracking down to 6.0%. Australia relies on growth in Asia and especially China, so the ASX will likely be affected by the slowdown in China.

3. US Unemployment Rate:

US unemployment has dropped to 3.7% (September 2018) and is at the lowest point since the late 60’s. Wages growth has been flat, but now there is ‘full employment’ it’s likely there’ll be pressure on wages to attract good employees. That means increased cost to business and potentially less profit. Add this to interest rate increases and the US/China trade war, and it builds a picture of headwinds in the US economy.

4. Housing:

Melbourne and Sydney are not the only cities that have seen housing prices explode over the last 5-6 years. Low interest rates in all developed economies have helped housing prices grow at a substantial rate. Property prices are now dropping in major cities, and in the London area especially due to the difficulties of Brexit. New home sales and building starts are down year on year. This will help put a drag on growth and add to share market volatility.

5. Brexit:

I’ve thrown this in given the Euro area and the UK combined is the second biggest market/economy behind the US. There’s a bit of argy bargy going on and the UK government looks all at sea with their negotiations. Any bad news will probably have an adverse effect on share markets and currency values.

So, what should you do?

Right now, we think it’s best to sit and do nothing. We’ve been forecasting a market drop in the range of 20-30%, and this hasn’t eventuated, and it may not. Global markets will more than likely remain volatile with any good or bad news pushing prices up and down. So, it’s not a good time to buy or sell.

Your investment portfolio should be set up in a way that helps reduce the impact of volatility, including diversification and income from investments. It should be structured in a way that will mean you don’t need to sell down investments, and you should be able to ‘ride’ the market recovery if a sharp correction (or crash) does eventuate.

Thanks for reading through this, there’s a fair amount of information, so please call or email if you have any questions or concerns.

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