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Sharemarket Volatility

The recent sharemarket correction explained

Nathan Lear
Partner/Private Client Adviser
20 Feb 2018

There has been a fair bit of talk about the recent sharemarket falls over the past few weeks. The US sharemarket fell by 10%, meaning it was a technical correction. When the US market stumbles the rest of the world usually follows. The Australian sharemarket fell around 6% over the course of a few days.

I was pleasantly surprised that many of my clients took this market movement in their stride, taking it for what it was – a correction. Nonetheless, I thought now would be an appropriate time to give it some context and answer a few questions that might be on your mind.

What spooked the market?

It all started on the back of good economic data in the US. Unemployment is at a 17-year low and wage growth at its strongest levels since 2009.

How can this be a bad thing?

  1. High wages can result in lower shareholder profits
  2. A strengthening US economy points to a strong likelihood of rising inflation that would most likely trigger the US to raise interest rates at a faster pace
  3. Rising interest rates generally result in funds flowing out of equities and into interest rate securities that chase higher yield

Are corrections like this normal?

Market corrections are not uncommon. It is not unusual to see the sharemarket fall 10%, even during strong bull markets. For example, on five occasions during the 2003-2007 Australian bull market, the sharemarket had a correction of 5% or greater, with the biggest correction being 12%. At the same time, every single one of these years had a very strong return.

In more recent years, the Australian sharemarket has had several pullbacks:

  • In 2012 a fall of 10%
  • In 2013 a fall of 11%
  • In 2014 a fall of 8%
  • In 2015-2016 a fall of 20%

Has the market given up a lot of ground?

Let’s put the US fall of 10% into context. The US market increased 25% in the 2017 calendar year and January 2018 began strongly. Therefore, a 10% fall is only giving back part of those gains. To put last year’s gains in perspective, on average it is up around 8% per annum but last year was three times this.

In addition, global markets have already shown a recovery since the recent pull back. The US and Australian sharemarkets have recovered around half of their recent losses.

Is this the start of something worse?

This is a hard question to answer and is really anyone’s guess. Yes, the threat of rising interest rates can spook the market, however as it was on the back of positive US economic data, it does not necessarily mean that the US is heading into a recession. Tax cuts in the US have the potential to continue to spur the market on. The overall trend is still strong.

How do I protect my portfolio against further falls?

Your investment portfolio should be designed to protect you in uncertain times. A diversified portfolio helps to reduce the risk of falling markets as not all markets are perfectly correlated.

As different asset classes fluctuate in value, regular rebalancing of your portfolio helps to realise profits from strong performing assets or asset classes and seize investment opportunities in quality assets that may have been oversold. 

Think long term! Markets can be very irrational in the short-term, but the long-term trend is typically upwards. It is almost impossible to time markets and it is dangerous to go to cash or sit on the sidelines waiting for further falls.

If you would like to discuss how you can go about investing in uncertain times, don’t hesitate to contact a Hewison Private Wealth Independent Financial Adviser.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.