As you may be aware, it has been a volatile time for markets both home and abroad which has rightfully raised concern for many investors. The US and Japanese shares have fallen approximately 10% from their highs to their recent lows , Eurozone shares have fallen 8%, Chinese shares have fallen 9% and Australian shares have lost 6%.
As highlighted in December in our Christmas newsletter “a small correction of 5-10% early next year is a potential (with Trump, North Korea and the Fed being potential triggers) however long term investors should not be concerned”. Even now we still do not anticipate a sustained bear market (as that would need either high odds of a recession or valuations that are not just rich, but in bubble territory) and we may have seen the worst, but it’s too early to say for sure.
Last year we felt that one of the triggers would be the Federal Reserve, high was the case, however there have also been two other drivers as well.
The first driver was the worries that the US inflation rate wold rise faster than expected resulting in more rates increase by the US Federal Reserve. This has been a concern for some time as the US economy has benefited from low rates for some time and it rate tightening has been on the agenda for the last couple of years.
The second driver was the growth in the US market and how it has not have a decent correction since before Donald Trump was elected president. In some ways the US share market was long overdue for a correction however the timing of such an event is always difficult to predict.
The third and final driver is related to winding up of investment positions in exchange traded investment products accelerating the drop in the market.
With shares having had approximately a 5 -10% decline from their recent highs to their low, we may have seen the worst however this will depend on investor sentiment and also the unwinding of investment positions.
As we have discussed in the past, it is always worth reminding ourselves that this is a normal market occurrence and corrections of 5-15% can be seen as healthy in some ways as they help reduce excessive risk taking. For example, approximately the Australian share market had a 10% pullback in 2012, an 11% fall in 2013, an 8% fall in 2014 and a 20% fall between April 2015 and February 2016 all in the context of a steady rising index. And it has been similar for global shares, but this has been against a stronger market and hence growth being one of the second drivers for this present correction.
Source: ASX, AMP Capital
Market volatility has returned, and there are some risks ahead. Saying this, our view is similar to last year and we do not anticipate a sustained bear market. We are presently not in ‘bubble territory’ nor entering a recessionary period at this stage. At the risk of sounding too flippant, it’s just another correction.