Ignore the swings and roundabouts

Australian sharemarket investors are facing a test of faith this week.

Australian sharemarket investors are facing a test of faith this week as our broadly buoyant local market looks set to be tested by US-based concerns on the so-called “Trump trade”.

Fears Trump may not deliver on several outsized promises to both American investors and business leaders dragged global markets sharply lower yesterday and local investors discovered Australia is no exception, with the ASX down 1.6 per cent — the worst day since last November when Trump was elected.

Many market analysts expect a sell-off in the US sharemarkets is inevitable — if not this week then in the months ahead. Wall Street has surged a substantial 10 per cent since the arrival of President Trump and his promises of faster economic growth in the US coupled with lower taxes, protectionist policies and looser banking regulations. For Australian investors, yesterday’s downturn was a useful reminder how tightly the ASX tracks in line with the US, especially in times of volatility.

Advisers regularly warn share investors they must be prepared to endure sudden swings on markets at intervals: indeed most long-term sharemarket investors will accept the maxim that says “markets go up by the stairs and down by the elevator”.

One useful consolation for active investors –— who may well seek to lift cash lev els in the weeks ahead if yesterday’s bearish sentiment extends — is that cash rates have at last begun to improve, especially if investors are prepared to use term deposits.

However, a deeper concern may be the nature of yesterday’s mood swing on the global markets where banks were the sector most heavily sold off in the US, Asia and on the Australian markets.

US banks recently reported mixed results. But the immediate trigger for the sell-off in American bank stocks was that the predicted and ongoing uptick in bond yields may be stalled following less aggressive comments from the US Federal Reserve when they lifted US official rates last week.

High bond yields are usually useful to banks, which can make more money on the funds they lend in an environment of rising bond yields.

Our own banks led the drop yesterday with Westpac the worst performing bank of the big four, dropping more than 2 per cent. Bank stocks account for one of the largest sectors of the ASX by market capitalisation and any prolonged sell-off in bank stocks will bring the broader market with it.

What’s more, our banks have distinctly “local” issues which could turn difficult, especially exposure to residential housing.

That’s the bear case.

If the US recovers the ASX will very likely follow suit. Earlier readings of US futures do not signal a major sell-off.

Either way serious sharemarket investors simply must roll with the volatility — it’s just a bit easier to handle when it’s soaring higher than plunging lower.