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Posted October 15, 2018 by MoneyLink

Market Wobbles are to be Expected

The 1929 share market crash began in October. So did the 1987 collapse. The 2007-09 crisis almost did … with the All Ordinaries Index starting its fall on 2nd November.

So, are the losses of last week the beginning of another major slump?

The trigger for last week’s falls was a report showing US unemployment fell from 3.9 to 3.7 per cent last month, and wages increased. Investors fear wage demands will continue to increase, boosting inflation. That would require more interest rate rises sooner.

The impact of unemployment and inflation

Central banks aim to maintain full employment while controlling inflation. The Federal Reserve restricts inflation by raising short term interest rates. It did that in September and has foreshadowed another rise by Christmas.

Long term rates determined by financial markets are also rising. Yields on ten-year US Government bonds have risen from 2.8 to 3.2 per cent in the last month. Higher rates increase the cost of finance for both consumers and businesses, retarding economic growth.

The US economy is growing

So, the good news of a strongly growing US economy can be seen as bad news. Interest rate rises have been expected. The latest information suggesting they may come sooner than anticipated, has scared some investors. Reassuringly though share markets have picked up again since.

The US Federal Reserve says it expects at least three more years of economic growth. Retail sales and consumer confidence are strong. The third quarter reporting season has started and analysts expect company profits up 21 per cent on a year ago.

Global outlook is positive

Australia’s Reserve Bank says global economic growth is continuing at a healthy pace and inflation remains low in most countries, including our main trading partners. It expects the Australian economy to grow a little over 3 per cent in both 2018 and 2019.

Fund management company Janus Henderson thinks commodities are only three years into an eight-year growth cycle, which is important for Australia. Australian company profits rose ten per cent last financial year.

Fundamental economic and business conditions are sound here and overseas. However some shares do look expensive. In the US high growth stocks like Facebook, Apple, Amazon, Netflix and Google lead falls. Growth stocks here like CSL, Cochlear, Wise Tech Global, Afterpay Touch and Appen also fell.

With prices of these stocks well ahead of their current earnings they naturally fall most when confidence is dented. There is room for a correction, a reality check, so last week’s losses are healthy.

No major threat to financial markets or shares is evident but future growth may be slower and volatility greater.

This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of
MoneyLink Financial Planning Pty Ltd ASFL No: 247360.

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