US Market Correction

After the S&P500 and Dow Jones reached a record high in January, it was followed by a tumble that shook the U.S. stock market. The Dow plunged by more than 1,100 points on the first few days of February, erasing any gains made in January. The ASX followed, similarly having a dip on the first Monday and Tuesday of February, eventually picking back up.

What caused the large drop is up for speculation. However, the market was long overdue for a market correction. The S&P500 and Dow Jones have constantly been reaching new record high month after month. A correction being a ~10% decrease in market, is anticipated to adjust the overvaluation of these record hitting indexes.

A key indicator of what caused the US and ASX stock downfall was the inflation and interest rates in the US. Investors in the US are worried that creeping signs of elevated inflation could disrupt the US economy. The reason for increased inflationary expectations was due to the positive US employment date released last Friday 2/2/18 which prompted the FED to suggest a larger than expected hike in the US cash rate in 2018. Concurrently, the positive signs from the US labour market also indicate that the economy’s resources are proportionately being allocated more towards labour rather than capital. Share markets typically reflect investments in capital within the economy and therefore the losses seen last week could be a reflection of this change in the allocation of economic resources in favour of the labour market. The raised inflation could also result to the Federal Reserve to increase interest rates more quickly than expected, making it more expensive to borrow money.

Not only are traders affected by these market volatility but so are everyday Australians who invest their retirement into Superannuation. We’re looking at 14.8 million individuals across Australia who have their funds invested in super. $356 billion worth of our super is invested in Australian listed shares topped with $368 billion listed in international shares which both fluctuate with these volatility. Many Australians would be concerned over the recent events, however if we look at a macro lens, is there really much to be apprehensive about?

For more information or to speak with an experienced and qualified Financial Planner, contact our offices today.