Market correction, be alert not alarmed

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The recent market correction has gathered momentum with the ASX 200 down to around 5,200 after nudging almost 6,000 points earlier this year. This has generated lots of media attention.

So it begs the questions – What’s really going on?

Be Alert, Not Alarmed

Share markets around the world have been in something close to freefall in recent days. The US share market has plummeted by almost 10% in just the past week, while the Australian market has fallen 12% since the end of July, including 7% in the three days to Monday this week.

There are a number of reasons why this correction has occurred. The 2 major factors are:

  • The initial leg of the correction in June was caused by worries over Greece exiting the Eurozone and the potential flow on effects this could have in Europe.
  • The second leg of the correction over the last few weeks has been driven by a further deterioration in the outlook for China, reinforced by the latest Manufacturing Purchasing Managers Index Survey, which showed the worst reading since, the depths of the Global Financial Crisis in March 2009.

Recent developments

Here is the state of play in current markets:
  • The oil price has fallen to $US38 a barrel, the lowest since 2009, exacerbating the sell-off already taking place in energy stocks and global commodity markets.
  • Global equity markets also weakened significantly. The US S&P500 was down 3.2% on Friday and a further 3.9% on Monday on high trading volumes. The S&P500 has fallen 10% in August.
  • On Monday the Dow Jones Index fell 1089 points on the open before closing 588 points down and has now recorded its biggest three-day fall in record.
  • The lower oil price impacted bond markets with 10-year US bond yields moving below 2% (from its high of 2.48% in June) in early trading on Monday, the lowest since April 2015 as markets push out the prospect of the Fed lifting rates in September.
  • European markets have also fallen, with the Euro Stoxx 50 down 5.4% on Monday to 2.3% for the year.
  • The ASX200 fell 4.1% on Monday and is down 12.3% for August (worst month since 2008) ‑ its lowest level since July 2013. It is up almost 3% at 1pm on Tuesday.
  • The AUD has fallen to around $US0.72, its lowest level since April 2009 and has been on a steady depreciation path for the past year.

Outlook

It is important to note that apart from China there has been no signs of renewed economic weakness in the US, Europe or Australia.

The current correction may continue a little longer until US equities come back to within fair value range but should then dissipate. This is nothing more than an adjustment required to temper US market exuberance, reflective of a proper functioning market system, rather than any reason to be concerned.

The current correction represents a good opportunity to accumulate Australian equities for those investors that may remain overweight cash and retain a medium term view

Although China’s slowdown could continue for some time yet, there remains some key positives:

  • The worlds’ largest economy, the United States, remains in good shape and Europe is improving also.
  • Although the domestic economic outlook is mixed, the Australian sharemarket is now trading below fair value. Buying shares at these points typically rewards long term investors.

What does the market volatility mean for your investments?

Wealth Accumulators:

It’s time in the market, not timing the market, that’s important. So if you can ride out the volatile times, you could have a smoother return over the long term. Diversifying your investments can help to defend against volatility and reduce risks. You can diversify across a variety of investment options.

It’s also important to manage your expectations. A slower global economic growth rate means a period of lower returns on traditional asset classes. Returns in the decade leading up to the recent Global Financial Crisis were abnormally high, so it’s important you don’t use these returns as the norm. It’s also a good idea to be aware of your own tolerance to risk so that you can assess new investment opportunities as they arise. So don’t be discouraged when you hear the word “volatile”. Talk to your financial advisor today, to see what type of action best suits your investment plan.

Pre and post-retirees:

If you’re in retirement or nearing retirement, it is understandable you want to protect your investments. After all, your investment returns play a vital role in funding your retirement. In times of volatility it’s easy to react emotionally. But now is the time to keep a level head and stick to your long term investment strategy. Trying to time the markets and responding to every market movement could leave you considerably worse off. It’s a good time to speak to your financial adviser and remind yourself that markets do recover. Don’t let short-term volatility get in the way of your longer-term needs.

For more information please do not hesitate to contact us.

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