Money Matters Monday 12th February 2018
Share Correction No Great Concern
The All Ordinaries Index of Australian shares fell 4.7 per cent last week. In the US the Dow Jones lost 8.9 per cent and the S&P 500 fell 7.2 per cent. Shares in Europe, Japan and China also sold off. Some days saw big falls but there were also days of recovery.
The trigger of the volatility was a US report showing more new jobs created last month than expected, unemployment at a 17 year low and wages rising more than forecast. The next day another report showed new unemployment claims fell to a 45 year low. But good news was bad news.
The impact of the US economy’s growth spurt
Investors concluded this will bring big increases in wage demands and pay rises causing a jump in inflation, forcing the US Federal Reserve to raise interest rates to slow it. The US tax cuts and bigger deficits will also see extra government borrowing putting upward pressure on rates.
Higher interest rates will mean higher finance costs for businesses and reduced spending capacity for consumers, reducing company profits. As the US is the world’s biggest economy and consumer market these developments will affect companies worldwide.
With lower company profits likely some investors decided to sell. Negative speculators jumped in and worked hard talking the market down so they could profit.
However they didn’t have matters all to themselves. On some days bargain hunters moved in keen to buy strong companies at reduced prices. Tech stocks such as Apple, Facebook and Google were most popular. Previously US shares were fully priced, perhaps a little overpriced.
Market corrections are ‘normal’
Global share markets have enjoyed a nine year positive run since the global financial crisis of 2008-09 with several short negative periods along the way so corrections like this are normal.
For 2018, analysts are talking of co-ordinated global growth with simultaneous economic expansion in the US, Europe, China, Japan and Asia.
Despite this, some fund managers and experienced investors believed share markets were overdue for a correction. Even when economic and business conditions look strong history shows corrections eventually appear. Such reality checks are healthy.
Volatility may continue
Perhaps the most surprising fact is that investors were already well aware there will be interest rate rises this year with the Federal Reserve previously indicating three are likely. This latest information suggests increases could come sooner, but rises aren’t new news.
There has been no significant change in the underlying economic environment or in business conditions. The fundamentals still look healthy. This setback is unlikely to lead to a serious market slump, though volatility may continue.
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