Mar 07, 2019 / News

Financial Planning

Market Update (Summer 18/19)

Uncertainty over US monetary policy, US-China trade relations, the wavering strength of the EU economy were in focus during November. This further impacted market volatility and the direction of major equity market indices.

Equities markets suffered significant losses in October with the US S&P500 index falling 6.9% and Australia’s S&P/ASX200 index ending the month 6.1% lower. There were initial signs of a bounce with the US market up more than 3% by mid-November but investors remain cautious and further falls were seen as November progressed. It should be remembered that similar falls were seen early last year when the S&P500 fell 3.9% in February followed by a further 2.7% decline in March. Increased volatility is likely to be a continuing feature of sharemarkets over the next 12 months.

Initial selling was mainly concentrated in information technology stocks as investors became concerned that Apple’s sales may be faltering and that perceived data and content issues at Facebook could trigger a regulatory response. Retailers and energy companies also come under pressures as some firms reported worse than expected earnings, and the negative sentiment very quickly engulfed the entire market as broader concerns about corporate earnings growth took hold. 

Economic data provided little insight into the reason for such steep falls, but investors appeared to be reacting to the increasingly uncertain outlook in light of higher US interest rates, the US mid-term elections and the continuing global trade dispute. In particular, higher US interest rates were the consistent factor in the market declines seen in October and earlier in the year and will likely continue to play a large part in share market volatility in the year ahead. 

The trajectory of the US economy remains positive with the unemployment rate continuing to trend lower and consumer and business sentiment still healthy. In October, the US posted an unemployment rate of 3.7% – the lowest rate since the late 1960s. Consumer sentiment has eased back slightly recently but remains at elevated levels. Despite robust economic growth, sharemarket falls may prompt a self-fulfilling prophecy where consumer confidence falters, company earnings dip and sharemarkets fall further. The alternative scenario is that economic fundamentals reassert themselves, investor confidence returns and sharemarkets rebound. 

In Australia, the Reserve Bank (RBA) released its quarterly monetary policy statement in November. This provided a slightly more positive outlook for the Australian economy with the RBA increasing its 2018 GDP forecast to 3.5% from 3.25% previously, but keeping the 2019 forecast unchanged at 3.25%. Stronger growth was also reflected in a lowering of the unemployment rate forecast to 5% by mid-2019 compared to the current rate of 5.1%. However, the unemployment rate is not expected to fall below 5% until 2020. Stronger than expected growth is yet to translate into significantly higher inflation. The most recent reading showed inflation at 1.9% – just below the Reserve Bank’s target range. This reinforced expectations that monetary settings will remain on hold at 1.5% for the foreseeable future.

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