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Is everyone aware that global markets took a somewhat heavy tumble two weeks ago?
Now that the dust has settled, let’s take a look back at the market pullback that “sent shockwaves around the world!” and was the “Dow Jones’ biggest one day point drop in history!”
Since 2009, Wall Street has been on a clear trajectory upwards with very little volatility, thanks largely in part to the monetary policy enacted by the Federal Reserve. In fact, in the entirety of 2017, the S&P 500 Index did not have a single down month. Also in 2017, for the first time since the GFC, all 45 countries tracked by the Organisation for Economic Co-Operation and Development (OECD) experienced GDP growth at the same time. Up until 2 weeks ago, all things global were looking pretty peachy. But the US sharemarket simply got ahead of itself – and it’s safe to say that what goes up must come down.
After a sell off the previous session which saw the Dow Jones Industrial Average drop 666 points, the Dow (made up of America’s 30 largest companies) made history with its 1,175.21 (4%) point drop on Monday 4 February sparking furious sell offs across the globe – Australia no exception losing $55billion at one point. Losses continued over subsequent trading sessions, with another single day 1,000 point plunge pushing the Dow into correction territory (10% fall from the previous peak). But let’s put things in perspective shall we – a 10% fall does not equal a crash and the point drop is relative, given that share indices, particularly US, have risen so much since 2009. The media do tend to omit these little tidbits when they are formulating the perfect headline.
So, again, to clarify, whilst the headlines screamed that it was the worst single day drop ever for the Dow Jones, it was the worst pointsdecline, not the worst percentage decline.
In addition, the sharemarket drops in Australia and the US really only took these markets back to levels seen in October and December respectively. Meaning, we’ve still seen some significant growth inclusive of the sharemarket drops. Glass half full, right?
I think investors tend to forget that the nature of sharemarkets is for them to go up and down, and a correction is certainly not a predecessor to a bear market. Many corrections have occurred over past bull markets, whilst still posting strong returns each year.
According to ANZ Chief Investment Officer Mark Rider, ‘January 2018 was a time of record inflows into global sharemarkets, with investors pushing many sought-after asset into “overbought” territory…meaning the market was vulnerable to any real or perceived bad news”. Fear that the Federal Reserve would raise interest rates faster than anticipated on the back of US inflation also rising faster than anticipated was a major driver of the correction. The fed has started raising rates given the relative strength of the US economy, however, raise them too fast and they risk halting not only economic growth but also sharemarket growth given higher bond yields being relatively more attractive to investors in that environment. Other causes for the pullback include that a correction was long overdue anyway as well as the unwinding of a large build-up of short volatility bets – that is, bets that low volatility, trending downwards since mid 2016, would continue.
Volatility is expected to increase this year given geopolitical risks, tighter monetary policy in the US and rising bond yields. But there is also expectation of continued global growth – currently growing at its fastest pace since the GFC – particularly in emerging markets.
At the time of writing, the Dow Jones had clawed back much of its decline (over 50% in fact), closing above 25,200 points on Monday 19 Feb (back to levels reached in early January). For the record, it peaked at 26,616.71 on Jan 26, and the correction took it to 23,860.46 by Feb 8.
Eureka Report – Seven reasons not to be too concerned.
ANZ APEX Insights – Understanding the dramatic sharemarket fall.