Current Market Volatility

As you would be aware there has been significant volatility experienced in investment markets over the past few days, particularly in the US, which has resulted in other countries including Australia being affected. 

Key thoughts are 

  • The initial trigger for the sell-off came from the wages data released Friday night in the US.  With wages increasing faster than expected, investors are trying to determine how many times the US Fed will raise interest rates this year, with consensus being 2-3 increases.
  • Unlike the US, Australian interest rates are unlikely to increase for some time due to the level of household debt and weaker consumer confidence.
  • The falls in the S&P 500 index have only resulted in it moving back to levels last seen in mid-December.
  • The US market is up approximately 300% since the 2009 lows, and increased each month in 2017, something that has never happened before.
  • Given the economic fundamentals in the US, Europe and Asia, the recent market movements are more a reaction to inflation expectations rather than fears of economic recession, increasing the likelihood that the pullback won't be deep or prolonged.
  • Many active fund managers have been holding unusually high levels of cash, waiting for a drop in markets to present an attractive entry point, which should help to cushion the extent of any decline.
  • Some of the sell off in the US markets is being attributed to computer based trading systems, which have predetermined "triggers" for selling shares. These triggers are typically based on the level of a particular index and occur automatically.  This, however, typically presents buying opportunities for active fund managers as some companies end up being oversold. 

With all this taken into consideration we expect the current market correction to be limited, and the likelihood is 2018 will still generate positive returns.  However we do expect that volatility will be higher than it was in 2017, particularly over the next few days.

If you would like to discuss the current volatility in more detail please contact our office.