PROFESSIONAL share traders love volatility of share prices. But we normal humans hate it.
The professionals have this quaint saying, “volatility is your friend.” That’s because they spend their day hunched over a computer screen constantly rapid-fire trading the peaks and troughs of different stocks.
The rest of us have a life and simply check in on our investments in an irregular way. So headlines that scream “crash” understandably spook us.
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This year seems to have been one of the most volatile in recent times. Remember the crash back in February, followed by big gains for a few months, before crashing again.
The sharemarket chart of the last year looks more like a picket fence than our preferred smooth upward line. At times like this, understanding what is driving the market’s volatility is important in calming the nerves and assessing the impact on your investments.
Markets hate uncertainty and there are basically five issues that are causing concern for investors and driving the volatility.
1. US-China Trade Deal
This war of words from US President Donald Trump has been going for months now. He is threatening to impose a 25 per cent tariff on any Chinese goods sold into America.
Why? It all stems back to his election slogan of “Making America Great Again”. He claims that many countries, but mainly China, have been flooding the US market with cheap goods, which have undermined American manufacturing, closed factories and lost jobs.
His answer is to slap tariffs on these cheap imports, make them more expensive so American-made goods will be more competitive, factories will reopen and more jobs created. The logic sounds good but economic history tells us that protecting local industries just makes them inefficient and more likely to lose in the long run.
For example, one of the main reasons Australia is in a world record 28th consecutive year of positive economic growth is because then Treasurer Paul Keating cut (not increased) tariffs to force local companies to be more efficient to survive.
The US tariffs on Chinese imports were scheduled to start on January 1 and markets have been jittery because they are uncertain of the impact. At the recent G20 meeting Trump extended the deadline 90 days and indicated negotiations were going well.
The sharemarket rose significantly on the prospect of the US and China agreeing to a trade deal. Then last week Trump tweeted that he now wasn’t so confident of an agreement … and the sharemarket crashed.
Until this trade deal between the two countries is finally sorted, markets will remain very nervous.
2. FAANGs under scrutiny
They are the biggest and most powerful technology companies in the world — Facebook, Apple, Amazon, Netflix, Google — and they have been the darlings of the sharemarket, producing massive profits for investors.
But now regulators are putting these tech behemoths under the spotlight for their business practices. Everything from data security through to tax payments and abuse of market power are under scrutiny. It’s a classic case of regulators slowly catching up with the full impact of a relatively new industry.
This attention has spooked investors, who are uncertain how the scrutiny will impact profits of these companies. And the uncertainty could continue for a while as it’s a multitude of governments and regulators around the world that are examining these companies.
3. Rising interest rates
As interest rates rise, money gets more expensive and loan repayments increase, which impacts profits and incomes. No one likes rising interest rates even when they reflect an improving economy.
While Australian official interest rates have been kept on hold for 28 consecutive months, the US has been increasing interest rates of late as its economy has continued to improve and grow strongly.
America’s Federal Reserve has been talking tough about another rate rise this month and then a couple more next year. The fear of markets is that the Fed will go too far too fast in raising rates and slow down economic growth that would impact company profits.
Markets are looking for the Fed to acknowledge the US economy is doing well and this cycle of interest rate rises is coming to end.
Here in Australia, our Reserve Bank seems pretty happy to keep official interest rates at current levels until well into next year at the very least.
4. Oil prices
Crude oil prices have been under pressure and, as a result, share values of major energy companies around the world have taken a battering. This time last year crude oil was around $US70 a barrel, but has dropped to around $US50 over the last couple of weeks.
The upcoming OPEC meeting of oil producing countries is looking like a key event to determine the immediate future of oil prices. If OPEC decides to cut production to boost oil prices then energy stocks will receive a good boost.
If they don’t, energy stocks will continue to flounder but consumers will get the benefit of lower petrol prices. Remember the cost of petrol is one of the biggest weekly expenses for the average Australian family.
Whether it’s in the US or Australia, upcoming elections are always unsettling. We’ve recently seen the American midterm elections completed and now the focus is on Australia’s federal election in the early part of next year.
As well as the traditional focus on economic management and public policy, this next election has the ALP looking to change the rules on negative gearing, capital gains and franking credits on dividends.
No doubt the Coalition will run a scare campaign on these changes, Labor will have to explain the changes and their impact with greater clarity. Either way it will create confusion and more than the usual uncertainty.
The sooner the election is over, the better for sharemarket certainty.
Originally published as Here’s what’s spooking investors