Off the back of October, which saw global markets tumble by 6.8 per cent and the Australian market fall by 6.1 per cent, investors have had no shortage of events to be spooked by.
But according to AMP Capital chief economist Shane Oliver, these events don’t spell the be all end all.
“Our view remains that recent turbulence in share markets is a correction or a mild bear market at worst (like 2015-16) rather than the start of a deep bear market like the global financial crisis,” Oliver wrote in an economist’s note.
These are the six worries investors have for the stock market – and why they needn’t fear.
1. US inflation and interest rates
With consumer confidence at an all-time high and unemployment at an all-time low, it makes sense for the Federal Reserve to continue raising interest rates in order to bring America’s monetary policy closer to normal. It’s created “consternation” among investors and the fear of another GFC.
“Several points are worth noting about this though,” Oliver wrote. First of all, the Federal Reserve can afford to hike rates at a gradual pace, with inflation under control.
“Second, on any measure US monetary policy is a long way from being tight,” he added. And finally, a return to more normal interest rates reflects “a stronger, more normal economy”.
Another hike will happen come December, but it’s nothing to freak out over.
“This will cause bouts of market volatility but it’s a long way from crunching the economy in a way that would bring on a deep bear market in shares.”
2. The US-China trade spat
It’s been one of the biggest geopolitical – and economic – events that have defined the year 2018, shaking up politics as well as share markets the world over.
“However, it’s still not as bad as it looks,” Oliver said.
First off, the tariffs implemented so far are only equivalent to an average tariff hike of 1.8 per cent across all imports, which the chief economist described as a “non-event” compared to the 20 per cent tariff hikes in 1930.
Secondly, US President Donald Trump does not actually seem interested in engaging in a global trade war given that the US has negotiated or is negotiating trade agreements with South Korea, Canada, Mexico, Europe and Japan. “He is not anti-trade per se, but wants ‘fairer trade’ for the US,” Oliver pointed out.
Thirdly, China has not retaliated to Trump’s threats of more tariff hikes but has instead pledged greater protections around intellectual property, the central issue surrounding the trade ‘war’. “This may help defuse the tensions a bit.”
Finally, Trump appears aware that the trade conflict is shaking stock markets – and he will want to resolve this well before he faces re-election in 2020. “The outlines of a deal are starting to become apparent,” Oliver noted.
3. US midterm elections
There were no surprises here – in stark contrast to Trump’s 2016 win!
“While the Democrat House will likely set up committees to investigate Trump and consider impeachment charges, it’s very unlikely to get the required 67 out of 100 senate votes to remove him from office unless he is shown to have done something really bad.
“All up, while there may be some skirmishes around shutdowns and debt ceilings, the midterm outcome could be positive because it means less policy uncertainty.”
4. US tech stocks
The US tech sector, which has accounted for a major chunk of US share market gains, has corrected around 13 per cent – but that doesn’t mean it represents a major crash like that of the dot com bubble at the turn of the millennium.
“Our base case is that the US share market will start to see a rotation from expensive tech to cheap cyclical stocks,” Oliver noted.
5. Worries about an imploding Eurozone
“Fears that the Eurozone is about to blow apart causing financial mayhem threatening global growth has been with us since the Eurozone crisis that started in 2010,” he said.
But long story short – don’t hold your breath. “Those looking for a breakup of the Euro can keep looking.”
6. Oil prices rising – and falling
Early October saw world oil prices reach their highest since 2014, fanning concerns about its impact on global economic growth and growing inflation.
“However, since then, the oil price has fallen by nearly 19 per cent,” Oliver pointed out.
“US sanctions on Iran have started but with little new impact as Iranian oil exports had already fallen and the US granted waivers to allow eight countries – including Japan, China, India, Taiwan and South Korea – to continuing importing Iranian oil,” he continued.
“The Iranian export cutbacks at a time of threats to production from Venezuela and Libya leaves a now tight global oil market at risk of higher prices, but for now the threat has receded a bit.”
So there you have it – let your weekend be free of worries about the state of global share markets.
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