Market Volatility: October 2018

Over the past two days, global share markets have fallen significantly due to growth concerns. One of the catalysts is the concern that rising US longer-term rates could lead to slower US and global economic growth. The second issue is the ongoing concern that the US-China trade frictions could develop into a more significant and protracted trade war. At the heart of both issues is concern about the potential for slower economic growth, and therefore slower sales and profit growth.

The market information below has been provided by Craig James, Chief Economist, CommSec.

What happened and what does it mean?

On Wednesday, European and North American share markets slumped. In Europe the pan-European STOXX600 index fell by 1.6 per cent while the German Dax index dropped 2.2 per cent and the UK FTSE index lost 1.3 per cent.

In the US the Dow Jones fell by 832 points or 3.2 per cent. A week earlier the Dow was at record highs. The S&P500 index lost 3.3 per cent and the Nasdaq index lost 316 points or 4.1 per cent.

Selling continued into Asian markets on Thursday. There was further selling in European and North American markets on Thursday.

In Germany the Dax dropped 1.5% and the UK FTSE index lost 1.9%. In the US, The Dow Jones fell by 546 points or 2.1% after trading in a 784 point range. The S&P500 index lost 2.1% and the Nasdaq index lost 93 points or 1.3%.

There were no direct ‘catalysts’ as such for the sharp falls on global share markets. Rather there has been an accumulation of factors over the past week, many relating to the strength of the US economy. Last week US 10-year bond yields lifted from 3.07 per cent to a 7- year high of 3.24 per cent on concern that the strong US economy may lead to higher inflation. On Friday 5 October, data showed that the US jobless rate had fallen to a 48-year low of 3.7 per cent.

On Tuesday the International Monetary Fund (IMF) cut its forecasts for global economic growth in 2018 and 2019 from 3.9 per cent to 3.7 per cent. The IMF attributed the forecast changes to the US-China trade dispute as well as the fact that a number of global economies were operating near full capacity, including the US.

It is important to highlight that the US Dow Jones index hit record highs a week ago with the Nasdaq at peak levels a month ago. So the sharp falls on Wednesday were from significant highs. Also it is important to note that the third-quarter earnings reports start on Friday with a number of banks to issue results. Some investors are no doubt positioning ahead of the reports.

What are the implications?

There are a number of challenges for policymakers. But there always are. The US Federal Reserve will try and avoid policy mistakes in determining the timing of rate hikes and the level of interest rates.

While the Australian share market is under-performing US share markets, it is out-performing the Morgan Stanley Capital International (MSCI) Asia Pacific index (ex Japan).

We see the potential for one further US rate hike in 2018 with two further hikes in 2019. Analysts largely assume that the US Federal Reserve will “pause” in its rate hiking path when the federal funds rate is near 3 per cent.

The US economy is operating at or near “full capacity” but inflation is contained. There are greater risks for policymakers in the current environment.

Determining how the US-China trade dispute will be resolved is difficult. Chinese authorities may decide to wait until after mid-term US elections in November before deciding the next move.

Understanding market volatility

By nature, financial markets can be volatile – which means they frequently move up and down. When there’s a fall in the market, it’s normal to have some concern about how this might affect your investments.

The effect on your long term financial objectives

When the market drops, you’re likely to notice a decrease in the value of your investments. This means that even if your investments fall in value in the short term, you can still expect them to generally recover in the longer term. That’s why it’s important to keep sight of the bigger picture and focus on how you’re tracking towards achieving your financial objectives.

It’s also important to remember that your exposure to these market events will depend on the make-up of your investments.

Talk to your financial adviser

Financial market movements can be complicated, and may seem overwhelming, but the important thing is to remain focused on your financial objectives and how you’re tracking towards achieving them. Your financial adviser can explain how any market changes may affect your personal situation and your long-term financial plan.

If you have any questions, please speak to your Johnstone Haines & Fergusson financial adviser.

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© 2017 Johnstone Haines & Fergusson