ASX 200 falls for fifth day as it heads towards bear territory

Australian shares are off more than 14 per cent since their recent peak and some economists predict the ASX 200 could head as low as 6000 points and into a bear market.

The US’s S&P 500 tumbled into bear market territory on Monday.

The Australian share market continued to lose ground Thursday following steep falls earlier this week and some economists expect it will follow the US market into bear territory.

Analysts are expecting further volatility after the US hiked interest rates by 0.75 per cent in the biggest single move since 1994 to combat a surging inflation rate of 8.6 per cent.

The Reserve Bank is widely tipped to follow suit by lifting rates by half a percentage point at its next meeting July 5, with many now forecasting a cash rate of more than 2 per cent by the end of the year.

The ASX 200 shot up in early trading Thursday but the gains then faded steadily. It eventually shed 0.15 per cent to close at 6591.1, making it the fifth straight day of losses.

CommSec senior economist Ryan Felsman

The wider All Ordinaries edged down 0.03 per cent to finish at 6783.7 points.

Investors have now lost more than $128 billion of value this week in the most severe plunge in two years as fears of inflation, interest rate hikes and possible recession tighten their grip.

BetaShares chief economist David Bassanese anticipates the US National Bureau of Economic Research will at some stage between now and end-2023 declare that a US recession began between June 2022 and June 2023.

He predicts a “less comforting” outlook for equity markets in the US and Australia given historical performances and because “when the US sneezes we catch cold”.

The average bear market decline during a US recession is around 35 per cent, with the slumps during the Global Financial Crisis and Dotcom Crash in 2008 and 2001, respectively, closer to 50 per cent.

“Wall Street does not yet seem priced for recession, and there seems scope for equity markets to fall further,” he says.

“My base case is the ultimate peak-to-trough decline in the S&P 500 will be 35 per cent, implying a decline to 3100 from its closing peak of 4796 on January 3.”

While difficult to endure, markets will eventually bounce back and may also bring in good buying opportunities.

“The local share market will not be immune to further Wall Street weakness, especially as we also face uncomfortably high inflation and likely aggressive RBA rates hikes in coming months,” Mr Bassanese forecasts.

“While I am still hopeful the Australian economy can avoid recession, it is at least a 40 per cent risk in the coming 12 months.

“Either way, our sharemarket will likely follow the US into bear market territory, with at least a 20 per cent peak-to-trough decline likely in coming months – that implies a decline in the S&P/ASX 200 to at least 6000 (from a recent peak of 7592 on April 21).”

The ASX 200 is currently down 14 per cent from its peak, while the S&P 500 on Wall St tumbled into bear market territory on Monday after shedding more than 20 per cent since a record close on January 3.

CommSec senior economist Ryan Felsman said investors should brace for more instability and a likely fall in company earnings.

“We expect that aggressive rate hikes by central banks will contribute to further volatility in global share markets over the coming months,’’ Felsman wrote in a client note.

“While share prices have already declined, earnings have further room to fall as economic growth slows.’’

Michael McCarthy, chief strategy officer with Tiger Brokers, said the Federal Reserve had restored its credibility after weathering criticism that it had been too slow to reign in the most severe outbreak of inflation in the past 40 years.

“The central bank’s initial view that the post-Covid lift in prices was transitory caused concern, as economists fretted that the Fed was ‘behind the curve’. Last night’s action demonstrated a willingness to risk recession to head off a damaging price spiral,’’ Mr McCarthy said.

Randal Jenneke, head of Australian Equities at T. Rowe Price, said the world was now paying the price for too much economic stimulus rolled out over the past two years to blunt the effects of the Covid-driven downturn.

“The key to understanding global equity markets in 2022 is that after unprecedented fiscal and monetary stimulus to counter the pandemic-induced recession of 2020, central banks and investors are faced with rising inflation that is at multi-decade highs,” Mr Jenneke said.

“With hindsight, the stimulus and liquidity provision by central banks over the past two years has proved excessive and must now be curtailed.

“The upshot is that we have entered a more challenging investment environment where liquidity is being rapidly withdrawn as supply shocks increase, both in Australia and globally.’’