19 MARCH 2019
The last six months have been a volatile period for Australian and International markets. Between 31st August and 21st December 2018 the ASX 200 dropped 15% to reach its lowest point in two years, and from there quickly rose 14.5% from the start of January. It is an interesting quirk of mathematics that it takes a greater percentage gain to make up for any percentage loss, for example going from $100 to $90 is a 10% loss, but going back to $100 is an 11.1% gain. The chart below shows the performance of the ASX200 (not including dividends, or income) over the last 10 years. The recent correction and recovery can clearly be seen on the right hand side and there have been a number of similar events over the last decade. Despite these ups and downs the long term trend is sustained growth. To put numbers behind this $100,000 invested in Australian shares in 2009, with the dividends reinvested, would today be worth over $260,000.
Many of the issues that caused the drop at the end of 2018 were responsible for the recovery at the start of this year. Markets were initially very concerned about trade posturing between the US and China, but they are now ‘optimistic an agreement will be reached’. Next, markets were concerned the US Federal Reserve was raising interest rates too quickly (following record lows after the GFC), but later buoyed when the Fed Reserve said they ‘saw no need to increase rates further in the short term’. I think this is a good reminder not to pay too much attention to finance reporting and short term market movements.
On the topic of interest rates it is interesting to look at what Australian rates have actually done over the last decade. Post GFC the Reserve Bank of Australia dropped rates from 6¼ to 3%, raised them again for a period and dropped them to 1½% in August 2016. Since then they have held at this point and not moved. An official rate rise this year is not looking likely, especially when banks have already raised their lending rates in response to increased borrowing costs. One concern economists do hold with interest rates already at 1½%, is that if there is a recession the Reserve Bank can’t further lower interest rates to stimulate the economy, since they are already so low.
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