Market Volatility in the headlines

12th February 2018 Tags: , , ,


‘How the financial wobble will hit your back pocket’

‘Volatility now the new norm’

‘Keep calm and enjoy the drama of a market meltdown’

‘Bloodbath: New Zealand sharemarket braces for blow’

Wow!  Reading this it is a wonder any of us get out of bed in the morning.  These are just some of the headlines on the New Zealand Herald website this morning (Source:   12th February 2018).

The headline that really caught my eye last week was “Billionaire bashing: Rich listers lose $129 billion in crash”. Such dramatic headlines are just pure scaremongering.  Did they really “lose” $129 billion?  No – because the Dow Jones closed that day at 23,860.  The article noted that that was a 1032 point decline.  It then went on to fall as low as 23,425 during Friday but closed the week at 24,205.

Yes, there was a significant loss in value over the week but when do investors actually lose money?  For the week ending 9th February 2018 the Dow Jones “lost” around 4.5%.  Over the twelve months to that same point, the index gained 18.5%.  The emphasis is certainly that short-term volatility needs to be put into longer term perspective.

Globally, share markets have fallen over the past few days, giving back 6% of recent gains.  While this has been quicker than the usual decline, the size of the pullback is actually within the “normal” bounds of market behaviour, even when share markets are generally rising.  This is something that tends to be forgotten in the media.  (Not to mention that most investors have a diversified portfolio, with other investments such as fixed interest and property that smooth the bumps from share markets.)

Investors had been favoured in 2017 with unusually smooth returns, which has fed its way into general public expectations and newspapers’ interpretation of the recent pullback.  For 2017, the US share market index (the S&P 500), only had four declines from its peak that were greater than 1%.  The largest fall was only 2.8%!  This smooth performance, despite a positive economic outlook, is not normal.  History suggests that on average, share markets actually have a 5% pullback once per year, and a 10% decline every two years.

Not only is the recent fall well within this “normal” range, but it comes after a strong gain in January, so the S&P 500 index is still up around 1% for the year so far.

How have New Zealand shares reacted?

Closer to home the NZ share market had a quieter start to the new year, and after reopening following the Waitangi Day holiday, fell only a relatively muted 1%. This is quite typical for the local share market in these scenarios, given its more “defensive” nature.

There are still positives in markets

While pullbacks create volatility and fearful newspaper headlines, they often turn out to be buying opportunities when looking back, once clearer thinking prevails.  Looking ahead, our assessment of the underlying fundamentals driving global share markets is that they remain very much in place:

  • Economic growth remains positive;
  • Business and consumer sentiment is upbeat;
  • Interest rates are still supportive; and
  • Corporate earnings are still growing nicely.

These key pillars are still driving markets, and it’s not just in pockets of the global economy, but everywhere from North America, to Europe, to Asia.  While wage growth and inflation has been singled out in the recent pullback as areas of concern, they both remain well within the range that is generally positive for share markets.

 The message remains constant, staying disciplined within your investment strategy is key to achieving your longer term financial goals.


Sources:  Booster Financial Services Limited and Jane Benton, G3 Financial Freedom.