Aussies Need to Not Panic as Market Volatility Rises

Many Aussies are panicking over the recent market downturn. The AU200 has dropped 11.2 per cent over the past year. Many factors are driving the current market decline.

Although this stock and bond market crash has been concerning, it is a good idea not to make any impulsive decisions. The market will eventually rebound, so it doesn’t make sense to sell at a loss before the recovery.

Why are portfolios losing value right now?

Current economic conditions have been very volatile recently, hurting the value of stocks and other financial assets. Some of the factors driving volatility are listed below.

Rising inflation

Inflation is hitting consumers hard, both in Australia and abroad. For example, the Governor of the Reserve Bank of Australia recently projected inflation would reach 7 per cent by the end of the year. Inflation is also surging in many other countries. For example, the United States announced that inflation is at the highest point in 40 years.

Inflation heavily affects the direction of the stock market. It increases the cost of inventory, labour and materials, which hurts company earnings. It also hurts consumer purchasing power, which can drive down sales.

The downturn in the United States stock market

The economies of different countries are more intertwined than ever before. Unfortunately, this means that the recent United States stock market correction will likely affect Australian stock prices. American companies purchase goods from global suppliers and hire workers in Australia and other countries. If their revenues suffer during an economic setback in the US, countries that do business with American companies will feel the pain. Many Australian companies also invest in the United States stock market, so their revenues will be directly affected by a stock market correction in the United States.

Supply-chain disruptions

Ongoing problems caused by the pandemic and war in Ukraine have disrupted global supply chains. In addition to increasing inflation, supply-chain disruptions are causing shortages of essential goods. Australian companies are having difficulty boosting production in light of these shortages, which is hurting their revenues and stock prices.

War in Ukraine

The war in Ukraine is causing severe problems for the global economy. Some of the reasons are listed below:

• The biggest reason is that it is driving fuel and food crises. Russia and Ukraine are major exporters of wheat, natural gas, oil and other essential goods. Since exports have plummeted from these countries, prices of these goods are rising sharply.
• Many countries are investing more heavily in their defence, limiting money available for social programs that are important to the economy.
• Concerns about the possibility of war expanding to other countries have left many consumers and businesses on edge. Their anxiety could affect spending, which in turn affects the economy.

All of these factors are adversely affecting the Australian economy and the stock market.

Bond market crash

Last fall, the Australian bond market fell to its lowest point in decades. While it has started to rebound, it is still near historic lows. Bond investors have suffered significantly as a result.

In most cases, this would be good for the stock market and potentially offset losses with bonds since stocks and bonds tend to be inversely correlated. However, Nasdaq writer Martin Tillier shows this rule of thumb doesn’t always hold true. In this case, the tumbling bond market also appears to have harmed the stock market. One potential reason is that investors have sold bonds at a loss, which has left them with less money to reinvest in stocks.

Reasons not to panic

Aussies are understandably skittish about the recent stock market crash. However, there are several reasons not to panic.

History shows markets recover from severe corrections

History shows the stock market recovers from major downturns. The Australian stock market fell 40% during the global financial crash, but it increased 40% each of the following two years. It will recover after this setback as well.

Selling now would lock in your losses

Since the stock and markets will inevitably rebound, it doesn’t make sense to sell now; you will lock in your losses instead of enjoying the benefits of the rebound.

Strategies are in place to ride out the storm

Pension programs and other financial institutions have contingency plans in place to deal with these setbacks. Moreover, these funds are well diversified to soften the blow of a market crash.

Don’t sell at the bottom of a downturn!

The stock and bond market downturn has understandably been painful for many Australians. However, it is going to rebound. You don’t want to sell your stocks and bonds at a loss before that happens.

 

If this article has inspired you to think about your own unique situation and, importantly, what you and your family are going through right now, please contact us. 

 

(GNS Group)