Share markets volatility continues

9 February 2018

In summary:

  • This week's stock market pullback was likely driven by concerns over company valuations, rather than fears of a recession
  • However, the economic conditions in the USA and Europe are strong
  • Superannuation investments should be viewed as long-term, and short-term movements in the share market should not drive a knee-jerk reaction to switch to cash

Read on if you're investments savvy

After an exceptionally strong year in markets, volatility struck in recent days. Earlier this week, the S&P500 Index fell roughly 9 percent from its record close on January 26

Many of our members asked if this was the start of a bear market. Our answer – probably not. Bear markets are almost always caused by a decline in the real economy. That’s because it takes a recession to simultaneously damage both how companies are valued AND their earnings growth. 

And right now, this does NOT look like a recession scare. Instead, two distinct forces are conspiring against global equities. 

  1. The high frequency U.S. data suggests inflation is starting to re-accelerate – wage growth in the January employment report touched its highest level since 2009. This pushed the 10-year U.S. Treasury bonds yields up to its highest level in four years. Higher discount rates were proving to be a challenge to the elevated valuation levels of U.S. stocks.
  2. Investor sentiment has taken a hit – market psychology was bordering on euphoria in late January and came back down to earth. For example, in a recent Consumer Confidence Survey, the share of respondents expected stock prices to hit an all-time high in January, which it did. This fall represents a correction in the market and is generally a healthy development for the market outlook.

Looking to the Future

Economic factors and future company earnings are actually quite robust. 

The J.P. Morgan Global manufacturing index hovered close to an 82-month high in January. And the fourth quarter corporate earnings season in the U.S. is tracking ahead of schedule. Over 80 percent of S&P 500 Index companies are beating revenue estimates (i.e. one of the highest beat rates in many years) and earnings growth is tracking higher than 13%. 

Recent economic trends in Europe and Japan are even stronger than the United States, which is great news.

Bottom line

This week saw healthy correction in markets, rather than the onset of a bear market. But we will continue to monitor economic and market conditions carefully in the coming days. We see this sell-off in asset prices could create an attractive entry point for investors to take more risk.

Superannuation investments should be viewed as long-term. Short-term fluctuations in share markets are normal. Switching out of your chosen investment option invested in shares and into cash means that you lock in share market losses, which might otherwise be recovered in the ordinary course of market fluctuations. And this may have a detrimental impact on how much you save for your retirement.

We’re here to help

Please call 1300 361 477 if there are any questions. 

Source: This has been adapted from commentary provided and approved by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (“RIML”).

This document contains general advice only and doesn't take into account what you currently have, want and need for your personal circumstances. It is important for you to consider these matters and read the Product Disclosure Statement (PDS) before you make a decision about a superannuation product. You can get a copy of the GuildSuper PDS by calling 1300 361 477. You may also wish to consult a licensed or appropriately authorised financial planner. Guild Trustee Services Pty Limited ABN 84 068 826 728 AFS Licence No. 233815 RSE Licence No. L0000611 as Trustee of the Guild Retirement Fund ABN 22 599 554 834 (which includes GuildSuper) MySuper Authorisation No. 22599554834526.