There are some heavy emotions attached to the share market, aren’t there?
Emotions like greed and fear, and the anxiety attached to uncertainty.
This week has seen the Australian Securities Exchange swiped sideways by heavy selling.
The benchmark ASX200 index closed Friday’s session down 116 points, or 1.7 per cent, to 6,474 points.
So, from its all-time high set in August last year, the Australian share market is now down 15 per cent.
To be classed as a “bear” market, it will need to fall at least a further 5 per cent.
So will it? And then what happens?
Let’s take a look.
The market damage has been extensive
Global shares are down around 6 per cent, and Australian shares are down by around 7 per cent (as of Friday afternoon) on the week.
Stock falls have been led by technology stocks and resources (miners), retailers and financials (banks).
From their all-time highs last year or early this year, US shares have now fallen 24 per cent, and global shares have fallen 21 per cent.
So, what’s going on?
It’s actually painfully simple: global inflation is on the march up. In response, central banks around the world have raised interest rates.
The US Federal Reserve decided to be quite aggressive on that front, raising its “Fed Funds” rate — equivalent to the RBA’s cash rate target — by 0.75 per cent.
It was the sharpest increase in its benchmark rate since 1994.
Economists say the Federal Reserve will keep raising interest rates and that has the potential to push the economy into a recession.
“I now foresee a US recession within the next 12 months,” BetaShares chief economist David Bassanese said.
What about Australia?
Well, National Australia Bank chief economist Alan Oster mentioned in a podcast this week he saw the chances of Australia entering a recession now at 30 per cent.
But some, like AMP Capital chief economist Shane Oliver, think it’s more likely than that
“We remain of the view that a global recession can be avoided, but with central banks now hiking rates aggressively, the risks have increased to the point that it’s now close to 50/50,” he said.
More selling in store
Dr Oliver has seen his fair share of financial market movements.
In his previous role as head of investment strategy at AMP Capital, he also oversaw over $1 billion in managed funds.
He said it’s too early to call an end to the current wave of selling.
“It’s still too early to say that shares have bottomed,” Dr Oliver wrote.
Why? Here’s the crucial point.
Financial markets are speculating right now about how much damage rates will do to business bottom lines rising and therefore the health of the economy.
We simply won’t know how much damage rising rates have done, or will do, until companies announce their annual profits later in the year, or other official data is released.
Until then, economists and market analysts will look for evidence, and any evidence they find that’s not encouraging about the economy, will likely send shares lower still.
There’s a lot of emotional energy attached to these market movements too (worn by the traders), so the volatility we’ve seen in recent months is likely to remain.
Not to mention the sheer volume of money being carried through the financial markets, and the stress attached to that.
There’s a lot a stake.
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