If you believe the media headlines, share markets are in trouble!!
But that is just NOISE. Yes, the Australian market has experienced its worst week in almost 2 years falling over 10% since its peak in August last year. But if we refer to the chart below, illustrating the strong growth of the Australian share market, the recent volatility needs to be kept in perspective.
What’s happening now?
A fall of 10% or more is often referred to as a market “correction”. It's important to remember that market pullbacks are not uncommon — and occur in most years. These market corrections can be healthy in resetting share valuations and investor expectations.
The opportunity for us is to take advantage of current investor behaviour. When share prices fall dramatically, many investors often panic and sell. Fear and selling generates more fear and selling. Emotional investors will forget that company earnings and global growth are looking robust. These market pullbacks offer us an opportunity to buy good quality companies at cheaper prices.
What’s causing this volatility?
In short, the provision of easy and cheap money is coming to an end and inflation is rising.
Central banks have been employing various monetary policies to stimulate their economies over the last decade. We have known that these policies will reduce and end sometime but the reality of it happening soon (March in the US) has global investors quite fearful of what that truly means for share market valuations. Importantly though, moving to a more normal environment indicates that global economies are in reasonably good shape.
Inflation is not 'out of control'.
The US narrative around “out of control” inflation is spilling over into Australia’s media. The inflation we are seeing in Australia is high by recent historical standards but is still low compared to other comparable countries especially when you strip out the prices of goods and services that rose because of pandemic-related economic disruptions.
We should remember that over the past few years the Reserve Bank of Australia (RBA) has achieved exactly what it intended to do, entirely consistent with its mandate. Its core objective is to keep inflation between 2% and 3%. Right now it is 2.6%.
Where to from here?
It remains to be seen how long the market turbulence will continue. We know that markets can be volatile in the short term. However, having a long-term strategic investment plan and sticking to that plan through periods of market volatility can help keep you on the right track to reach your financial goals.
If you have any doubts about your existing investments or would like a second opinion, please feel free to reach out and contact our Director of Wealth Management, Bruce Dyason, who would be happy to provide you with an obligation-free comprehensive review.