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We have had a few calls/emails from clients and have been closely watching the market falls over the past 2 days and we thought you may find it helpful to hear from us re what these might mean for you.
I have held a teleconference with the Chrysalis Investment Committee analysts over the issue and discussed it with some of our fund managers.
In short, there is nothing to worry about here.
What we are seeing is a technical correction in the US off the back of a very long bull run period in their market and economic growth which is very strong and therefore inflation rears its ugly head. The weapon to destroy inflation (which is like cancer in an economy) is to increase interest rates. Because the Growth figures that came out of the US a couple of days ago were stronger than the market expected, it is factoring in the US Federal Reserve bank increasing interest rates more than what has been factored in up till now. The interest rate rises in the US will effect the sharemarket there but also globally as we are all interlinked now.
So this correction is just resetting share values because of too much growth. A great problem to have. It’s usually the opposite. It’s healthy, expected and nothing to worry about. I always say I prefer a correction than a crash and prefer a crash to a collapse (GFC). That’s what happens if markets don’t correct along the way.
We fully expect the markets to shortly bounce back from this one. Indeed I note this morning as I write this to you, the US Dow Jones index is up 2.33% overnight so today might be recovery day already. Awesome buying opportunities!
I’ve also attached below the comments from our Chrysalis Committee and also a comment from the Chief Economist for AMP, Shane Oliver:
“The past 2 days have seen equities worldwide being sold-off heavily. The catalyst for this sell-off was stronger economic data coming out of the US, which has led investors to believe that the US Federal Reserve (Fed) will increase interest rates faster than initially anticipated in 2018 to offset the possibility of increased inflation.Despite the best stretch of synchronised global growth in a decade, inflation has not worried investors and central bank monetary withdrawal has been gradual and transparent, putting a lid on yields and inflation, so far. This has seen volatility remain particularly low in 2017 and equity markets rallied strongly across most economies around the world. This was particularly the case in the US, with US equities reaching record highs and valuations being stretched.
However, with the passing of the ‘Trump Tax Cuts’ and US unemployment falling to a 17-year low of 4.1% in January 2018, this has resulted in annual wage growth increasing to 2.9% for US workers. It is this outcome that has prompted the recent sell-off as the markets believe that inflation is likely to rise along with volatility. As a result, bond yields rose 0.18% last week and continued this rise further this week in anticipation of there being increased inflation and volatility.
At this early stage, it is our view that with valuations high and markets having delivered strong returns for many years, a sell-off of approximately 5% is not unexpected. The news triggering this is that inflation may be higher than initially expected (that is benign), which could lead the Fed to raise rates potentially more than implied market expectations.
It is our view also that wage growth would need to increase to around 3.5% before the Fed is likely to change their position on increasing the number of rate rises. In addition, we believe the Fed will want to see further evidence of a longer term trend in rising core inflation before changes are made to their policies.
Therefore, we have held our current position and are monitoring developments.”
Chrysalis Investment Committee comment
We hope this information helps ease any concerns you may have had from the media! As always please don’t hesitate to contact us if you have any questions.
