You’ve probably heard about the recent decline in the US stock market and its flow-on effect to Australian shares. So what does it all mean for your investments and goals?
Recent market movements at a glance
- On Friday February 2, US sharemarkets began a much anticipated pullback from record levels, prompted in part by fears of higher inflation and high interest rates in response to a strong economy. The Dow Jones fell by over 665 points or 2.5 per cent on Friday, following on with a 4.6 per cent fall on Monday.
- US sharemarkets have been volatile over the remainder of the week but generally weaker.
- So what has prompted the declines for key US share indexes – declines that have spread to other markets in Europe, Asia and Australia? One influence was the latest US jobs report. US non-farm payrolls (employment) rose by 200,000 in January, ahead of forecasts for an 180,000 gain. The jobless rate was unchanged at 4.1 per cent as expected. But the key result was wages or average earnings, up by 0.3 per cent after a 0.4 per cent gain in December. That put annual wage growth at an 8-year high of 2.9 per cent.
- The worry was that stronger wage growth could lead to higher prices (inflation). And that could lead the Federal Reserve to be more aggressive in lifting rates.
- Now higher interest rates aren’t necessarily bad news if prompted by a stronger economy. But if rates rise it could lead to slower consumer spending, slower demand for new homes and slower growth in profits, thus affecting share prices.
- While these falls have indeed been quick and the media’s response predictably dire, it’s important to keep the current correction in perspective. Prior to these falls, the Dow Jones index had increased by over 30 per cent for the year, with the S&P500 up by over 20 per cent. These are large gains by any historical standard – and so, while no doubt unpleasant, a market correction that takes back some of these gains is not at all unusual.
- The important point is that economies are in far stronger shape than they were a year ago or five years ago. Economies are growing at a faster rates and profits are rising.
Jason Cook, Financial Adviser, WB Financial
Phone 07 3391 7199 or email firstname.lastname@example.org.
This market update has been prepared by Financial Wisdom Limited 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Presidio Financial Services Pty Ltd ABN 67 118 833 168 ASIC ID 312532 trading as WB Financial and Authorised Representative ASIC ID 286296 are authorised representatives of Financial Wisdom. This document contains general advice. It does not take account of your objectives, financial situation or needs. While care has been taken in the preparation of this market update, no liability is accepted by , its related entities, agents and employees for any loss arising from reliance on this market update. You should consider talking to Jason Cook, Financial Adviser, before making a financial decision. Information in this document is based on current regulatory requirements and laws as at 9 February 2018, which may be subject to change.