Market Update: Understanding Recent Volatility

Market update

Understanding recent market volatility

Financial markets have shown significant volatility in early February. While share markets around the world have fallen, bond yields have risen (prices dropped).

The market correction 

The primary reason for the recent share market correction is the increasing likelihood of inflation rising in the US. Inflation drives interest rates higher and could create more difficult operating conditions for businesses in the future. Share markets generally try to anticipate the impact of economic information and strong economic growth around the world, as well as wage increases in the US, have been seen by investors as potentially damaging to corporate profits. 

Why this happened

Since the Global Financial Crisis (GFC) in 2009, global shares have risen approximately 230%. At the same time, cash rates (interest rates set by central banks such as the Reserve Bank of Australia) have been at record low levels due to policies undertaken by many of the world’s central banks in an attempt to encourage economic growth. Low interest rates make it easier for individuals and businesses to pay down debts and as illustrated in the chart below, have encouraged investment in assets like equities and property.

Equity Returns: 10 year US Government Bond Yield and US Cash Rate
10 year US Government Bond Yield and US Cash Rate

Due to the success of central bank policies, economies around the world have been growing in a self-sustaining way. We’ve seen significantly reduced unemployment, moderate wage growth and the first signs of inflation have driven interest rates higher in the US. Share markets are closely linked to interest rates and higher interest rates can lead to share market volatility due to markets attempting to establish the right prices.

In addition, as markets become more volatile, investors can react negatively which results in further market losses followed by even greater fears. If this cycle continues market losses can be compounded far beyond what is reasonable. At this stage it appears markets have begun to re-assess the true risks in the market, with the US market starting to level out in the last day or so.

Looking long term

Losses of recent days, while dramatic, are very small in the context of equity market performance over the last nine years, as shown by the blue line (MSCI Index) in the chart above. You can also see that sharp corrections to share markets are quite normal from time-to-time and are part of investing in equities. As markets continue to assess the impact of rising interest rates, continued volatility can be expected. 

At EISS Super we remain focussed on protecting members’ capital whilst also growing it in order to meet your retirement goals. Our cautious approach provides the most efficient manner of balancing investment risks to protect capital whilst also capturing the market upside. Whilst markets will continue to move up and down over time, be assured that the team at EISS Super are managing your money professionally and prudently to smooth out these fluctuations through well diversified investment options.

What should you do as an investor?

Markets rise and fall from day to day – but as an investor, it’s the long-term growth outlook that truly matters. That means it’s important to stay focused on your long-term goals and hold the investment portfolio most likely to help you achieve them.

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Our friendly team are here to assist. For more information, you can call us on 1300 369 901 between 8:30am and 5:00pm (AEST) Monday to Friday or email us at [email protected]