Stocks rebound amid volatility: What it means for Aussies
Fears of a global recession grew after a massive stock market sell-off. Now the ASX and other stocks have rebounded, experts have revealed what it means for you.
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A bloodbath on Wall Street triggered fears of a global recession as panic selling spread around the world, with Japan suffering its biggest loss since the 1987 Black Monday crash.
The Australian (ASX) and New Zealand (NZX) stock exchanges, the first two to open after the weekend, saw massive falls, with the S&P/ASX 200 index suffering its biggest wipe-out in four years.
The sell-off continued in major European and Asian exchanges as markets braced for the opening bell of the New York Stock Exchange after weak jobs data, released before the weekend, spooked investors at the possibility of a recession.
BREAKING: S&P 500 falls 3% in its biggest one-day drop since September 2022 https://t.co/iXiIQXcnMXpic.twitter.com/uruXsLnJ0N
— Bloomberg Markets (@markets) August 5, 2024
Wall Street’s tech-heavy Nasdaq Composite index immediately tumbled 6.3 per cent at the open, with the S & P 500 falling 4.2 per cent and the Dow dropping 2.7 per cent.
All three major US stock indexes were tracking towards their worst day since 2022, with the Dow down 1,088 points, or 2.7 per cent, The S & P 500 down 3.3 per cent and the Nasdaq Composite down 3.95 per cent as the end of trading approached.
The world’s largest bank now predicts a 50 per cent chance the United States will enter a recession, fuelling calls for the emergency lowering of interest rates.
The ASX has since rebounded. Reserve Bank governor Michele Bullock said a rate cut was some time off as rates were kept on hold at 4.35 per cent.
“So based on what I know today and what the board knows today, what we can say is that a near term reduction in the cash rate doesn’t align with the board’s current thinking,” she said.
“We’ve seen from overseas experience how bumpy inflation can be on the way down and across the economy.
“We need to see demand and supply coming back into better balance. Now, I understand that this is not what people want to hear.
“I know there are many households and small businesses that are struggling with interest rates where they are.”
Here’s what the stock market plunge and rebound means for Australia and the rest of the world.
WHAT IS HAPPENING IN AUSTRALIA?
The Australian Stock Exchange (ASX) was the second to open after New Zealand, giving investors the first look at the global market’s reaction to the US’s weak economic indicators.
The S & P/ASX 200 index lost 3.7 per cent and $A102 billion in value was wiped out.
Australia’s stock market is slightly higher on Tuesday after a massive rebound in the Japanese market, which could lead to a bounce in the US.
Australia’s stock market rebounded after a selloff in global risk assets.
The ASX 200 index ended 0.4 per cent at 7680.6 after rising to 7713.7 as the Nikkei 225 rose as much as 12 per cent. The Nikkei closed up 10 per cent after Monday’s 12.4 per cent plunge.
The Reserve Bank board has also left the cash rate unchanged at 4.35 per cent.
IS AUSTRALIA IN RECESSION IN 2024?
No, Australia is not in recession. A recent KPMG report from July 16 reports the Australian economy staggered into 2024, edging close to recession with just 0.1 percent growth over the quarter. “The Australian economy grew by a meagre 0.1 percent over the first quarter of 2024 and just 1.1 percent over the previous 12 months,” it stated.
“Household consumption has grown by 0.4 percent during the quarter, slightly higher than what occurred in the December quarter 2023.
“Labour productivity, measured as GDP per hour worked, flatlined over the quarter and through the year as hours worked grew in line with GDP.”
IS THIS ANOTHER 1987 OR 2008 STOCK MARKET CRASH?
Of the market crashes in recent history, the 2024 sell-off is looking more like 1987’s Black Monday than 2008’s Global Financial Crisis.
Almost 40 years ago, the S & P 500 was down more than 20 per cent in its biggest one-day fall ever. Industry analysts say the defining feature of 1987’s Black Monday and 2024 is that the losses were currently confined to the stock markets.
It’s not yet known how far the losses could spread beyond the stock markets and, if like in 2008, it causes a wider meltdown.
AMP Capital chief economist Shane Oliver said it was too early to say whether the sharp falls seen on the ASX and overnight in the US were precursors to a broader economic downturn.
He said compared to the sharp fall in 1987 and some of the daily stock market dips of 8 per cent during the 2008 recession, yesterday’s drop was “a non-event”.
“A 5.7 per cent all is not a big fall. The fall we’ve seen at this stage in market stages wouldn’t classify as a correction,” Dr Oliver said.
“It’s severe on the day but could be a bit of an overreaction to some degree. Wall Street fell 3 per cent, which is still bad, but is wasn’t as bad as what was feared.”
He said sudden dips were “quite common when a market is rising”, which Australian has been in since 2020 (if you put aside the pandemic slump due to people being stuck at home).
“It’s not uncommon to get some sharp falls, it could just be one of those. Alternatively, it be the beginning of a bare market.”
Dr Oliver said the dip in Wall Street and with the rise in unemployment in the US to 4.3 per cent, investors were feeling nervous that we were headed for a recession, at least in the US.
HOW DOES A STOCK MARKET CRASH AFFECT THE AVERAGE AUSSIE?
A stock market crash can lead to fewer jobs, higher unemployment, workers can lose bargaining power with bonuses and pay rises being affected. Lenders can tighten how much credit is given to those seeking a loan. Household budgets can get tighter as cost of living pressures bite. Share portfolios can be affected as well.
According to Forbes, people should ensure they increase their emergency fund for living expenses just in case, cut back on unnecessary bills, pay down as much debt as possible, diversify income where there’s an ability to do it and be wary of potential for job losses and being ready to pivot to another role or career.
SUPER AND SHARES
Dr Oliver said a lot of Australians’ super would have taken a hit after yesterday’s fall, given a large proportion of Australians super accounts are tied to the share market.
“The unit price of your super will go down, just as it did last year when it fell. That is instantaneous. So far what you’re seeing isn’t that unusual,” he said.
He advised people with super tied to the share market to “sit tight”, explaining that playing the short game was riskier.
“People who get out in time might so OK but then they might not get back in on time. It’s really hard to time the market [perfect to make money in the short term] and is best to stick to a long term strategy with long term returns,” Dr Oliver said.
HOME LOANS
Dr Oliver said the hit to the stock market could result in a “silver lining” for people with home loans.
“It could be a silver lining and might mean lower interest rates,” he said.
“It could mean good news, assuming they keep their jobs [if we head into a recession].”
Ray White economist Nerida Conisbee agreed, if we moved into a recession it would likely result in lower rates.
“For people who have mortgages, the drivers of this share selloff are probably more positive. It is likely that we will see rate cuts soon rather than later,” she said.
But she also warned a recession would also likely bring with it job losses.
She said while there might be relief from possible rate cuts, the rise in unemployment that comes with a recession would likely result in households still feeling the pinch if one party was to lose their job.
Ms Conisbee said come the end of August there would be more data on Australia’s economic growth during the June quarter, as well as more reports on the rate of inflation.
“If we did have a negative quarter, that will strength the RBA’s desire to get rates down faster,” she said.
“Globally we are starting the see rate cuts. The UK, European Union, Sweden, Canada have all gone [for rate cuts]. It doesn’t necessarily mean Australia will be does show the world economists are starting to see much more weaker conditions and weaker inflation that supports cutting rates.”
She said that just yesterday the timing for rate cuts was February or March next year. But after the events of yesterday on the stock market and the RBA’s move to hold the current cash rate, Ms Conisbee said there was a chance those rate cuts could come as soon as October or November.
SELLING OR BUYING
Ms Conisbee said she expected property prices to “accelerate” as the interest rates lowered, even in Melbourne which has been a softer market of late.
For first homebuyers, Ms Conisbee said it was best for them to get into the market when they could, irrespective of the broader market activity,
She advised them to “stick to a budget and be mindful rates” but not to rely on potential future cuts.
WHAT IS THE REASON FOR THE STOCK MARKET PLUNGE?
The market meltdown was triggered by a weak US jobs report on Friday (local time) which showed the unemployment rate reached its highest since October 2021.
About 114,000 jobs were created in July – significantly lower than the 175,000 new roles forecast by Wall Street.
The report came two days after the US Federal Reserve decided to keep interest rates at a 23-year high while signalling that it could cut them in September.
“Investors are gripped by fears that the Federal Reserve has waited too long to pivot on its policy, especially in light of Friday’s disappointing US jobs data and a slew of other weak economic indicators pointing toward a looming recession,” said market analyst Fawad Razaqzada at City Index and FOREX.com.
WHAT HAPPENS IF THE STOCK MARKET CRASHES?
A stock market crash refers to when investor panic drives sale of shares and a rapid fall in share prices of at least 10 per cent on a stock exchange or major index in a day, or over a few days.
A stock market crash may be temporary, but it can also mean a longer downturn that can last for months or years.
WHAT WAS THE BIGGEST STOCK MARKET CRASH IN THE WORLD?
The worst stock market crashes of all time are:
*The Wall Street crash: 1929
*Black Monday: 1987
*The great recession: 2008
*The flash crash: 2010
*The OPEC crash: 2020
*Coronavirus crash: 2020
WHY DID THE NIKKEI DROP?
Japanese stocks suffered their biggest daily loss since 1987 as fears about a US economic slowdown sent global markets plunging.
The Nikkei 225 index of leading stocks in Tokyo lost 4,451 points, its biggest point drop in history. It closed more than 12 per cent down — according to Reuters, its largest one-day fall since October 1987. The drop took Nikkei’s losses since early July to 25 per cent, pushing it into bear market territory.
WHY IS THE JAPAN STOCK MARKET FALLING?
It happened because fears of a sharp slowdown in the US economy have raised expectations that the Federal Reserve will cut interest rates, and the Bank of Japan has taken its interest rates higher to contain inflation. This is increasing the value of the yen against the US dollar and making Japanese export-dependent stocks less attractive.
Trading was halted temporarily in Japan and South Korea to prevent panic selling.
WHAT ARE THE CHANCES OF A US RECESSION?
JPMorgan thinks there’s a 50 per cent chance of the United States entering a recession.
Goldman Sachs, meanwhile, placed it at 25 per cent, up from the previous estimate of 15 per cent.
The dire outlook could prompt the US Federal Reserve to cut interest rates by 50 basis points in September, and again in November.
Wharton School professor emeritus of finance Jeremy Siegel called for a 75-basis point emergency cut in the Fed funds rate, with another 75-basis point cut indicated for next month at the September meeting.
“And that’s minimum,” he said.
HOW DOES THAT IMPACT THE REST OF THE WORLD?
Fears of a US recession could have a major impact on global markets, including the end of interest rate hikes and the acceleration of cuts.
Analyst Karen Tso told Sky News central banks from the European Central Bank to the Bank of England and beyond “could be talking about more aggressive rate cuts”.
Betashares chief economist David Bassanese told AAP it would likely be the “final nail in the coffin” for the case to lift interest rates.
The Reserve Bank of Australia is expected to keep the interest rate at 4.35 per cent when it meets on Tuesday.
SHOULD I BE WORRIED ABOUT MY SHARE PORTFOLIO?
The CBOE Volatility Index — commonly known as Wall Street’s “fear gauge” — spiked in early trading to a high not seen since the early days of the Covid-19 pandemic in 2020.
The meltdown was triggered by both individual and institutional investors worried about the state of the global economy.
Seek advice from your professional financial adviser whether you should be worried about your personal portfolio of stocks.
IS A STOCK MARKET CRASH A GOOD TIME TO INVEST?
Firstly, this is not a global stock market crash. Investors have been selling off oil, crypto and tech stocks because of bigger bets hedged on AI from tech companies — and profits from AI have been non-existent.
Instead, investors are sticking to safer bets like bonds, sending Treasury yields lower.
Superannuation accounts may be affected but if one has a heavy mix of bonds, then they should not panic.
Lower US interest rates, if they were to be cut, could help lower high mortgage rates but mean those with savings in the bank may get smaller interest on their money.
Investors can take steps to protect the value of their portfolios.
Lindsay James, investment strategist at Quilter Investments, said: “Ultimately this period of outsized volatility against what remains a reasonably solid economic backdrop should present a buying opportunity for long-term investors.
“This can be a great time to take advantage of a better entry point with globally diversified, multi-asset portfolios.”
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Originally published as Stocks rebound amid volatility: What it means for Aussies
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