In the last few days we have all heard the news regarding the stock market. I saw headlines with the
\n words \u2018Bloodbath\u2019, \u2018Carnage\u2019 & \u2018Crash\u2019 to name a few.<\/p>\n
\n Of course, each headline is accompanied with statistics and facts about the size of losses and or
\n records broken. In fact, one of the radio stations had a news report that stated that the losses were
\n due to fear of a US recession but I am simply not sure how they formed this conclusion.<\/p>\n
\n The stock market is falling but this is both normal and expected. The Australian stock market has
\n done very well in the last 6 months. In fact, the ASX 200 rose from 5,650 points on the 3 rd of October
\n 2017 to 6,120 points on the 3 rd of February 2018 and this represents an increase of over 9% over a 4
\n month period. The US stock market has gone up even more and in fact went up over 7% in January
\n alone.
\n Investment markets simply don\u2019t keep rising and pull backs are very normal. Where they become a
\n concern is when the markets go into free fall like what happened during the GFC but even then they
\n slowly recovered all of their losses.<\/p>\n
\n It is important to remember that stock markets are \u2018leading indicators\u2019 and this means that their
\n movement is generally a reflection of where investors expect an economy to be going as opposed to
\n where it is now. Therefore, it is not uncommon to see stock markets go up significantly in the middle
\n of slow economic times simply because investors are basing their purchasing decisions on what they
\n perceive a company\u2019s profit will be as opposed to what it is now (i.e. you are buying based on future
\n potential growth).<\/p>\n
\n Shares will be sold off and markets will correct usually once investors have data that confirms both
\n current and likely future economic conditions. This is why stock markets sometimes fall when the
\n economic news seems to be good.
\n The US economy is not only the largest economy in the world but also the most influential. Their
\n unemployment rate is now very low (below that of Australia), their economy is growing and picking
\n up speed and for the first time in a very long time, wages are starting to increase. Lastly, they have
\n recently passed tax cuts and the expectation is that this will inject an added boost to their economy
\n in the years ahead.<\/p>\n
\n So why the sell off? The US economy is now doing well and this is improving the global economy.
\n Maybe it is because investors are now starting to get concerned about inflation. Higher wages are
\n great but they do lead to higher prices. Higher prices can cause inflation and this is usually followed
\n by higher interest rates. Higher interest rates and higher wages then eventually result in lower
\n profits for companies as their borrowing costs increase as do their staffing costs.
\n Bond yields are now starting to increase (first sign of rising interest rates) as investors demand a
\n higher interest rate for longer duration bonds to combat expected future inflation. There is also the
\n expectation that the US federal reserve will increase interest rates maybe 4 or 5 times this year.
\n Therefore this sell off is likely more to do with a re-pricing of shares based on new economic data
\n combined with profit taking of investors who have done well over the last year. Most economists are
\n not predicting a recession and in fact still feel that shares will continue to move higher albeit with
\n some corrections as is happening now.<\/p>\n