WEEKLY E-MAIL

6 February 2018

THOUGHTS ON THE RECENT CORRECTION ON WALL STREET

By Patrick Malcolm

Last week Wall Street fell over 1,000 points, reversing the sharp rises of earlier in the month. Many are asking if this is the start of a new trend on markets and what it all means for the Australian sharemarket.

Anton Tagliaferro, from Australian based fund manager Investors Mutual Limited, has recently provided some commentary around this. Investors Mutual manages QV Equities Limited, which is a listed investment company aiming to give investors the opportunity to invest in a diversified, carefully selected portfolio of quality entities outside of the S&P/ASX 20 Index.

The falls on Wall Street last week has to be kept in perspective of the sharp rises in this market over the previous 12 months. The Dow was below 20,000 at the beginning of 2017 and rose to over 26,000 in January 2018 – a rise of over 30%. What is remarkable is that it came about after 12 consecutive monthly increases in the US market – the first time in history that this has ever happened. It has also happened with volatility at record lows.

While the trends for global economic growth continues to be positive with many upgrading their outlook for 2018, this does put pressure on Central Banks around the world to reverse the very easy money conditions that we have seen since the GFC. The US Fed has increased the US Fed Funds rate three times over 2017 with further rate rises expected throughout 2018.

The overall Australian sharemarket has severely lagged the gains on overseas sharemarkets over the last 12 months. Having said this, specific sectors of the Australian sharemarket have had strong returns with the Resources sector gaining over 20% over 2017. BHP and RIO leading the charge as the iron ore, and oil prices rallied sharply over the year.

Other areas of excesses were apparent in the last 12 months as many markets globally rose on a combination of easy money and strengthening economic growth. The rise in Bitcoin over 2017 exemplifies the excessive bullishness and significant amount of loose money floating around the world with many investors throwing caution to the wind in the chase for higher returns.

While there remains a strong case for continued US rate rises and a reversal of the ECB’s excessive easy money conditions, it is likely that it will be some time before rate rises are seen here in Australia. The Australian economy continues to be weighed down by a geared consumer, and with house prices showing weakness recently, the Australian economy is likely to grow at below the level seen in previous years. Rates also in Australia appear set to remain low for some time yet – meaning that stocks with good yields will remain very appealing to Australian investors.

While it is always hard to forecast what sharemarkets will do in the short term, it can probably be concluded that:

• The current correction is overdue following 12 consecutive months of gains in the Dow, and it is unlikely that the same gains on overseas markets that were seen 2017 will be repeated
• While rates in the US may increase further in 2018, the RBA will probably keep Australian interest rates on hold for some time yet
• At some stage in the next year or two, the Australian dollar could weaken as US rates are lifted further, as US growth picks up, while the RBA keeps rates on hold.

Patrick Malcolm
Partner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 278061

If you have any questions or comments, please email me at patrick@gfmwealth.com.au

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