In the last few days you would have noticed a stock market sell-off happening worldwide. Between January 29, 2018 and February 6, 2018 stock markets have fallen significantly, for example:
Down Jones Industrial (USA) Down by 8.31%
DAX (Germany) Down by 4.78%
Nikkei (Japan) Down by 9.16%
ASX (Australia) Down by 4.27%
The sell-off started in the United States because the US economy is doing better than expected. Both job creation and wage numbers are beating expectations. It seems that fear of rising inflation and the consequent interest rate rises have caused this event. However, the US market has been overvalued for some time and due for a correction but it is strange that it occurred on very positive data. I believe that the correction would have occurred even if the data was not positive, perhaps more so.
The US sell-off has caused most other markets around the world to experience significant losses, including Australia. However, I believe that this is likely to be a short-term correction and possibly a good buying opportunity for the following reasons:
• The US economy created 200,000 new jobs in January 2018 and wages grew by 2.9%. This positive effect will increase demand and further boost economic activity and job creation;
• This positive result may cause interest rates to rise but rising rates are a signal of faster economic growth and faster growth is good news for corporate profitability and stock market returns;
• The economic outlook worldwide, not just in the US, is on the improve and there seems to be no evidence of an economic slowdown. The wave of global growth seems to be gaining momentum; and
• The momentum in global growth boosts Australia’s economy by lifting commodity prices, boosting national income, corporate profitability and tax revenues. It also provides support to demand for energy commodities, high quality food products, tourism and education. Furthermore, the lift in global optimism is supporting a pick-up in business conditions, driving rising local investment and hiring (Paul Bloxham, chief economist at HSBC).
It is strange that so much positive data about US and world economic activity would cause stock markets to tumble. Given all of the positive economic news around at the moment it seems unlikely that this is the start of another crash. It is probably a short-term correction for the overvalued US market. Unfortunately is has also caused other markets to follow the US lead but hopefully it is short-term and will end soon.
I do not believe there is any reason to consider changes in your portfolios at this stage.
Today (7th) showed some comeback with the US Dow Jones Industrial rising by 2.33%, The Japanese Nikkei growing by 3.21% and the Australian All Ordinaries recovering about 1.2% (at the time of writing).
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