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Blip or crisis? What 2016's horror start really means

For anyone invested in the stock market, it has been a horror start to the year.

Australian stocks have fallen by around eight per cent.

This is a sharp fall, especially given the slightly negative year for stocks in 2015.

The moves on the ASX are similar to those in other industrialised markets.

The main issues driving this negativity are the perennial concerns about the Chinese economy.

Also read: Aussie stocks nosedive as China halts trading

Market mayhem has seen huge stock market falls in Shanghai and erratic currency movements for the Chinese Yuan that have reverberated around the world.

It is interesting to see that the bulk of the hard economic data in the major economies has been good or very good.

In the US, the pace of job growth remains very strong and with that, the unemployment rate is low. In the Eurozone, business sentiment indicators and the labour market are improving.

Here in Australia, the early signs for 2016 suggest a continuation of reasonable economic expansion.

Australian retail sales are growing at a healthy five per cent annual pace, business expectations for the economy remain firm, even if they not strong.

While the housing market is clearly off the boil, at this stage all we are seeing for house prices is a stalling in the rate of increase, not generalised price falls, while the 2014 and 2015 surge in apartment building has come to an end with a glut of supply in several major cities driving new building approvals a little lower.

It is interesting to note that Australian stocks have traded poorly for many years.

Compared with the peak level in early 2008, the ASX today is down over 27 per cent.

Also read: Is Australia's economy facing another sluggish year?

For those investing just prior to the global crisis hitting, stocks have been a poor investment, offset a little in should be noted, by reasonable dividend flows.

The big question dominating markets now is whether this is merely a temporary blip – as we have seen on many occasions – or if it is the start of something more serious?

As has been the case most of the time in the last 25 years, there are reasons to be optimistic.

Policy makers learnt many valuable lessons during the recent global crisis. If conditions deteriorate further, they will ease monetary policy and deliver fiscal stimulus. These measures work.

This is why the futures market in Australia is now pricing in more than one 25 basis point interest rate cut during 2016.

It is why the profile for expected interest rate hikes in the US have been sharply pared back in recent weeks.

Some are even suggesting that the US Federal Reserve will not hike again as it keeps very stimulatory monetary policy in place as it underpins and extends the current US expansion.

Also read: How will the Aussie economy perform in 2016?

It is not clear when the current market ructions will end, but it will likely be tied to the authorities in China walking away from the misguided management of the market in the first instance, but then delivering policy stimulus in the not too distant future.

In Australia, policy makers are likely to sit tight and view global market moves with interest and some concern.

They will be ready to act if the worst happens.

For now, with the economy still rolling along, the best bet is probably to think the RBA will be on hold for many months to come and that the Budget in May will be framed around election economics which just might happen to stimulate the economy.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.

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