No GFC, just a correction

News | Date Posted: 9 February 2018

9 February 2018

Key points

  • No GFC mark 2.0 – just a natural correction.
  • The falls are off record highs – a correction was expected.
  • Economic conditions remain strong.
  • Volatility expected over the short term.
  • Long term, share markets still expected to perform well relative to defensive assets such as bonds and cash.
  • Financial advice can help. 

There has been much media attention in recent days around movements on investment markets. Looking behind the headlines, we see some key themes:

Firstly, ignore talk about the “the record X point fall in the index”. The index numbers (points) don’t matter and are in fact misleading. The key point is that while we’ve seen the worst points decline, it’s not the worst percentage decline… in fact, nowhere near it.

It is the percentage move which is important. In percentage terms, there have been more than 316 worse days on the US market since 1927 (you wouldn’t know it from the headlines!). A percentage fall off a high number will always see a greater number compared to the same percentage fall off a smaller number. For example, a 10% fall off a high of 10 will see a fall of one. A 10% fall off a high of 100 will see a fall of 10. Same percentage fall, much different number.

This is no GFC 2.0. Economic conditions remain strong around the world, companies are performing well and generating strong profits, and banks are in a strong position. All these were missing in the GFC.

The fall in markets is off record highs. The market had run up strongly in recent times, particularly in the US where the share market hit a record high on January 26. So, a ‘correction’ isn’t a surprise and far from uncommon. The fact it hasn’t happened for a while highlights the strong and consistent performance of markets over recent times. 

Also, keep in mind that generally, while things ‘feel bad’, the US market has only lost the gains it made so far this year. 

While short term falls can be unsettling, we must focus on the long term. Share markets are still up strongly over longer-term time periods.

  • In the US (as of today) – shares have returned 11.8% over the past year.
  • In Australia (as of today), the results aren’t as high – shares have returned 2.3% over the past year.

What’s caused the falls?

Fundamentally, it’s strong economic conditions that are behind what’s happening. This has led to fears that inflation, or the price of goods and services, and interest rates will rise. There is talk now that interest rates in the US could rise 3-4 times this year.

Because of this share prices have fallen on fears companies’ wage bills and costs of borrowing will rise. Adding further pressure on shares is that investors now see more value in bonds.

What’s our view for the future?

Short term we expect the volatility to continue. Don’t be surprised if markets keep bouncing around for a while yet.

However, despite this, our view for a while now has been that economic conditions globally are quite positive. While most markets are reasonably expensive given the sharp gains over the past few years, long term we still hold a positive view on shares. We believe they’ll outperform other asset classes over the long term.

What are we doing?

Over the past year we have worked hard to further diversify our portfolios and this remains the focus for the Mine investment team – to construct high quality, diversified portfolios. It’s this work that positions us well to provide consistent long term returns in all market conditions. The changes we made to our portfolio last year (lowering exposure to fixed income) has proven prudent.

Need help or have any questions?

Mine Wealth + Wellbeing Financial Advice are here to help if you have any questions about how your super’s invested in the current environment. They can help with investment strategies, which investment option is best for you and advice on how markets are performing.

If you’d like to talk to a financial adviser just give us a call on 13 MINE (13 64 63).

Past performance isn't necessarily an indicator of future performance.
Data sourced from Bloomberg.