Staying the Course in Current Market Uncertainty
Well the last few weeks has certainly been unprecedented and an adaption to life as we know it. We are seeing Government both here and around the world try to manage a health crisis while supporting the economy as much as possible.
We have seen Australian and Global share markets retain some volatility but they are currently in a period of ‘range trading’ (moving between two points in the market) based on current known health outcomes, travel restrictions and impact to the economy. This has been supported by the large amounts of money being put into the system by Governments around The World.
We are likely to see this continued volatility (even some more downside) over the coming months as the health impacts of COVID19 play out here and in the rest of The World and then we see the real economic impacts play out. We are likely to have economies go into recession (negative GDP growth for a quarter or more), however hopefully with the right amount of stimulus (which we have already seen) and economic support this will not be a deep and prolonged recession or depression event. Although it will be one that we all remember for the rest of our lives.
We often use history to try and predict future outcomes when it comes to economy and investment performance and possible returns. It is important to note that we can learn from history however our economy, markets, way of life, flow of information and use of and speed of money has changed remarkably since the ‘Great Depression’. So although this is going to have a recessionary impact on our economy (an the Global Economy) the programs announced by the Government’s of the world have been designed to assist keeping the economy going. Or as the Australian Government is saying ‘putting things into hibernation”.
It is important to remember the key philosophies around investment at this time. Set your framework aligned to your outcomes in life. Buy good quality assets and then as markets play out and (do what they do) hold the course (even when times are challenging).
Check out the following links for further information:
It is always about “time in the market” rather than trying to “time the market“. This is where asset allocation is important to ensure you are in a mix of assets across a range of different markets and industry.
Defensive Assets of Cash and Fixed Income paired with the Growth Assets of Property, Australian Shares and International Shares.
Past Quarter Performance
Shares dropped sharply in the first three months of the year as worries about the global coronavirus pandemic and its impact on businesses and the economy grew.
- The Australian Share Market (ASX 200) was down 27.6% to the end of quarter.
- The Dow Jones (US) recorded its worst start to a year in history, down 23.2% for the quarter.
- The S&P 500, meanwhile, logged its worst quarter since the final three months of 2008, down 20%.
- The Nasdaq Composite’s downturn was more contained. The tech-heavy index recorded its worst quarter since the final months of 2018, falling 14.2%.
History has shown us that after every market correction we have a recovery.
With this in mind it is always about aligning to your outcomes and time frame to needing the money. For clients who are closer to retirement you should have a strategy to be moving money from growth to defensive assets as part of your ordinary approach regardless of the pandemic we are now living in.
From Dr Shane Oliver – Chief Economist at AMP Capital:
Big differences verses past recessions and depressions
But while the slump in economic activity may be deeper than anything seen in the post war period, depression may not be the best description. Most definitions of depression focus on it being over several years and seeing a very deep fall in GDP compared to a recession which is shorter and shallower. The current hit to economic activity may be very deep but it won’t necessarily be longer than past recessions. And there is good reason to believe that if the virus comes under control in the next 2-6 months and we minimize the collateral damage from the shutdowns that the hit to activity may be shorter.
There are big differences between the current situation and that of past recessions and Great Depression of the 1930s:
First, recessions and The Great Depression (which saw GDP contract by 36% over 4 years and unemployment rise to 25% in the US and GDP fall by 9.4% in Australia with a rise in unemployment to 20%) were preceded by a period of excess in terms of investment, consumer discretionary spending, private debt growth and inflation that had to be unwound. This time around there has been no generalised period of excess and there has been no large-scale monetary tightening to bring on a downturn.
Second, monetary policy was tightened in the lead up to past recessions and in the early phase of the Great Depression whereas global monetary policy was eased last year and that easing has accelerated this month with rate cuts, a renewed ramp up of quantitative easing (QE) and central banks around the world establishing various ways to ensure credit flows to the economy. In the 1930s banks were simply allowed to fail. Now they are being supported by ultra-cheap funding. Much of this owes to the GFC experience which has made it easier for central banks to now ramp up QE and introduce support mechanisms.
Third, going into the Great Depression fiscal policy was tightened to balance budgets whereas in the last month we have seen massive and still growing global fiscal policy stimulus swamping that of the GFC. The latest US fiscal stimulus package alone is around 9% of US GDP.
As always if you have any questions about your current setup or arrangements feel free to contact us at the office. Seek out further advice and start your journey to being free around your money and creating wealth with understanding.
Scott Malcolm has been awarded the internationally recognised Certified Financial Planner designation from the Financial Planning Association of Australia and is Director of Money Mechanics. Money Mechanics is a fee for service financial advice firm who partner with clients in Melbourne, Canberra, Newcastle and Sydney to achieve their life and wealth outcomes. Money Mechanics Pty Ltd (ABN 64 136 066 272) is a Corporate Authorised Representative (No. 336429) of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.