The Dow Jones has swung more than 400 points for the last four days running. It’s been a wild ride on the ASX as well. I’d expect this volatility to continue over the next few weeks. The Dow finished 3.95% higher on Thursday after a drop in jobless claims and better than expected earnings.
I thought it would be useful to share the most common questions I’ve been asked over the last 2 weeks. They are:
Q: What’s happened in the markets?
A: We’ve seen a lot of volatility in financial markets in recent weeks because of a number of factors:
- The speed of global economic recovery has been sluggish.
- Global policymakers in the US and Europe have been slow to make decisions to restore confidence in their markets.
- Concerns about the ongoing debt situation in Europe.
- The US government has been slow to increase the debt ceiling, and the ratings agency Standard & Poor’s downgraded the credit rating of the US last weekend.
- The extreme swings of the past few days in global share markets were a result of all these factors building up, not just one single event.
Q: What does this mean for my Australian and Global investments?
A: Global investments, mostly shares, have fallen sharply as investor confidence continues to fall. Until there is some level of certainty in the markets, shares will continue to be volatile. This uncertainty will also flow into other parts of the economy, affecting consumer confidence, housing prices and jobs growth.
The Australian share market is not immune to these macro (global) issues and is expected to be volatile in the short term as we react to US and European markets rather than stock specific issues.
However the Australian market is somewhat more insulated from the global issues because:
- Our market is more reliant on emerging markets, which are less affected by current global market falls.
- The large amount of investment in the resources sector is likely to continue, providing a solid base for earnings for next year for many companies.
Q: Is this different to what happened with the GFC?
A: The Global Financial Crisis (GFC) in 2008/2009 resulted in a global recession that was driven by a liquidity crisis across a significant number of global financial institutions. The situation of the past week is partially due to how investors are feeling rather than directly related to problems in the financial system or the economy. Panic amongst investors can cause extreme levels of market movements, like what happened in the US and Australia over the past week.
Q: Will this volatility continue?
A: We expect that financial market volatility could continue for some time due to the general lack of confidence among investors, combined with worries about the health of the global economy. ButAustralia is in a relatively strong financial position compared to the rest of the world. We have:
- Low levels of debt
- A stable employment market
- A strong regulatory and governance framework
- Sound financial institutions
Some other positives forAustraliaare:
- Australiadoesn’t have a huge government debt burden compared to theUS.
- Australiais also able to use monetary policy to cut interest rates if necessary.
- Stock market fundamentals for the market are still strong.
Q: What strategy should I take?
A: Keeping calm is key
If you are concerned about whether your investments are still appropriate to meet both your short-term and long-term investment and lifestyle goals get in touch with us. And remember, you will realise a loss only if you sell now.
Focus on your long-term investment horizon
Despite global downturns in markets over the past 100 years, history shows that if you had invested for any 10-year period over the last 50 years, you’d always have made a profit – on average, of around 12% per year.
Financial market volatility is not a new phenomenon
It’s important for investors – especially during times like this – to take a deep breath, step back and look at where the value is. Markets move up and down but there is value represented in the marketplace currently.
Australian companies are still paying high dividends to investors. Income investors should focus on this. History says there will always be a bounce back. And, the long-term direction of the share market has always been up.