FROM LAURENCE SMITH, FINANCIAL ADVISER, UEM WEALTH
Stock markets sell off – why? Investment professionals (asset allocators) assess investment opportunities with a lens on the future by using what is known today and projecting that forward. Opportunities present themselves when what is known today about the future becomes unclear. In this environment, the collective assessment of the value of an asset can change quickly and lead to volatile, knee-jerk reactions in investment markets, which are amplified as everyone jumps on board. Over the last few weeks, we have seen the future become less clear than it was at the start of the year. Global and Australian stocks have dropped by around 10% (what the press likes to call a ‘correction’) as investors sell off and consolidate profits from a very favourable period of elevated stock market returns.
Why were conditions so good for stocks? When President Trump returned to the White House, it was clear that his policies would be pro-business, with proposed tax cuts, deregulation, onshoring, etc, combined with the US Federal Reserve being committed to cutting interest rates. The pro-business stance of the US President and the lowering of interest rates benefited stocks (and other growth assets) as the future looked rosy.
What has changed in a matter of weeks? However, despite all the positive market sentiment, the recent tariff war has escalated to a point whereby no one knows where tariffs end up, and if countries keep escalating in a “tit for tat” retaliation, global growth could slow while inflation rears its ugly head again. Add to the melting pot that the path of interest rate cuts is not as clear as it was only a few months ago (i.e. maybe they remain elevated for longer); you can start to understand why investment markets have become volatile.
Where can I get returns from? Even with the recent Reserve Bank of Australia interest rate cut in February (by -0.25% to 4.10%) the returns from cash are still relatively attractive, especially when compared to the Australian market dividend yield of around 4%. Similarly, in the US, the cash rate, despite the 1% of cuts that have already occurred, sits at 4.25-4.50%. While the dividend yield on US stocks is currently less than 1%. Against the backdrop of this attractive alternative, investors are willing to lock in profit and move to defensive assets (such as cash and bonds). Until the future path of tariffs, growth, and interest rates (the known knowns) become clearer, they are happy to sit on the sidelines.
Should I sell my portfolio today? The short answer is no. Investment portfolios are built based on an investor’s time horizon and how much risk they are willing to take to achieve the desired return. Importantly, portfolios are diversified across various asset classes (and sometimes different styles of investment managers) to ensure that the end goal of the portfolio can be achieved.
Any knee-jerk reactions and selling portfolios based on negative returns or induced by scaremongering from the press or backyard barbie banter can result in the portfolio being unable to achieve its stated objective. For example, if a portfolio was invested in the top 300 Australian companies listed on the share market between June 2008 and June 2024, the annualised return generated would have been 9.15% per annum (source: Lonsec Research). If the portfolio was sold down to cash during a volatile period and then reinvested when the conditions improved, but if the top 10 trading days were missed the annualised return drops to 5.95% per annum. Market rallies tend to immediately follow market downturns, which makes timing exits and entries to the market incredibly difficult, if not impossible.
The world is still adjusting to Trump 2.0, and we have already seen China stimulate their economy. In addition, other central banks around the world are loosening monetary policy as inflation slows. The ongoing conflicts in Ukraine/Russia and Israel/Iran continue to be a frustration however, any signs of peace will help investor sentiment.
To date, the correction has been focused on the more overheated stocks and sectors of the market that were priced for perfection.
In periods of volatility, it’s important to remember the adage, “It is time in the market and not timing the market”. Over the last two days (up to the 17th of March), we have seen markets rebound as investors start to dip their toe back in; however, only time will tell if we see a more permanent stabilisation of markets.
If you have any specific questions about how best to place your investments depending on your personal circumstances, a professional financial adviser is trained to provide this assistance.
Disclaimer
General Advice Warning – this is untailored, general advice. It does not take into account your personal circumstances. You need to decide whether it meets your needs. Laurence Smith is an Authorised Representative and UEM Wealth Pty Ltd is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd (AFSL 229892). Laurence Smith may offer services through UEM Wealth and UEM Group. Accounting services are provided by UEM Group. Financial Services (financial product advice and dealing) are provided by UEM Wealth. To the extent permitted by law, although the same adviser may offer you services under the above business, each business is solely and separately responsible for the advice they each provide.
