What in the world is going on?
Volatility seems to be a daily occurrence at the moment – oil prices are dropping, the Greek prime minister has resigned, the USA is thinking about increasing interest rates, China’s growth rate is expected to drop from 9% to around 7% and stock exchanges around the globe have reacted negatively to all of this.
The markets are simply not responding rationally! If today’s global economy is compared to what it looked like pre the GFC, it can be seen that the world is in a significantly stronger position. The stimulus programs that were implemented by many developed countries have done their job, European economies (with some exceptions) are performing a lot better, the USA is powering ahead and, even after recent losses, the Chinese stock market has had phenomenal growth in the last year.
There has been volatility and ups and downs in recent months but the reaction of stock markets in recent days is unprecedented and unwarranted. There has been little change to underlying market fundamentals. The overarching economic position of the countries that underpin the global economy are actually relatively stable (AMP – 25/08/2015).
In a 3 hour period after the Australian market had ‘closed’ on Monday the 24th August, the press reported that $40 billion, $50 billion and then $63 billion had been ‘wiped’ off the stock market. That’s a big variation – but which figure was correct? It sounded good (in a sad sort of way) and it certainly got people’s attention. We’ve often said that if the market falls 2 days out of 7, it’s the 2 negative days that will stick in people’s minds. With reporting like this further falls would not have been surprising, despite the fact that in a relatively short period of time those billions are likely to be recovered.
On Tuesday morning, the US market (which has a strong economic outlook and is growing significantly) dropped 588 points or 3.37%. This was, apparently, the biggest one day drop in this market since its bottom in 2008. The sole reason for this was fear and panic. As suggested by AMP Capital Chief Economist, Dr Shane Oliver, markets are “full of emotion and characterized by nervousness”. There is no other way to describe the reaction.
The predictions were that the Australian Sharemarket would follow suit that day. It opened very weakly, dropping close to 2%, but by the close of trading was up over 2.50%.
This improvement was quite surprising, however, it should not have been. It would seem that people saw the volatility for what it was – something that had little basis, was an overreaction and actually presented an opportunity.
On Wednesday the 26th August, the US market had its largest reversal since the bottom of the GFC. This occurred during the day, however the market ended 1.38% lower by the close of trade. By comparison, the London Stock Exchange was up by 3.09% over the same period. The Australian sharemarket rose another 0.74%. It was a very mixed and frustrating day.
What are all these things suggesting? People are buying shares, seizing opportunity, getting on with life and the efficiency of the markets will, over time, come to the fore. This is undoubtedly the case – it’s just a matter of when. With equal certainty, we expect that volatility will be significant for a while with the real likelihood being that markets will fall further.
The GFC was a very difficult time, there is no doubt about that. Elodus clients who stayed invested and contributed to their portfolios (and these were the majority) have made significant gains over the last 6 or 7 years. The Dow Jones Index (the US market) has risen appx 140% since that time and the All Ordinaries (Australia) over 61%. Property has performed very well, as have International and Australian bonds. Diversification, diversification, diversification – it’s so important.
We have many people contributing to their superannuation and other investments as we write this. Most are making their regular contributions, but others are investing larger, more significant amounts. We are very conscious of each client’s individual position and are not suggesting this is appropriate for everyone. It does, however, further support the view that business as usual is a real consideration.
As your advisers, we will continue to focus on strategy, knowing that the investments we have recommended to you are sound, are behaving as anticipated, will do the job they are designed to and remain cost effective. We ask you to recall the lessons that have been learned and draw rationally on what you experienced throughout and beyond the GFC. Indexation works (as has been rigorously tested and proven) and, given time, will provide great value and assist you to achieve your goals. We have many clients retiring annually and it is very gratifying to see that, even with a GFC, projections have been exceeded and financial objectives achieved. You will experience the same when your turn comes.
We will forward a more technical analysis of the situation in coming days. Regardless, we ask you to trust those that are assisting you and focus on the positives. We are available at any time to discuss your position, review your objectives and to answer any questions that you might have. Please don’t hesitate to take us up on this offer.