Making Sense of Stock Market Behaviour

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In the wake of the Greek financial crisis in Europe, world stock markets, including the beleaguered US ones, last week had downslides. Late in the week Australian markets also dipped but they are all now bouncing back.

A mate in the US I spoke to this morning said after yesterday trading,

“I need another rally to recapture losses from last week.”

As with many like me we have been concerned for our retirement and investment plans. Even short-lived shocks make us nervous as regained confidence in the Australian market has been supported by a strong currency with strong trading ties with Asia.

To help understand this more I got a timely email this morning from my financial advisors, Mathews Steer. It carried a tag line “Where do I go from here” and went on to say:

Last week the US and Australia saw some extraordinary market movement for asset classes across the board.

A weaker Asian market during Thursday (thanks to China being down 4%) set the tone for European markets to be weaker when they opened on Friday. Along with continued concerns over the protests in Greece put additional pressure on the Euro, which fell to levels last seen at the beginning of 2009.

Investors had potentially been looking for some additional information in relation to debt default risks in Greece and the possible contagion in to other European countries from the scheduled meeting of the European Central Bank, but this didn’t eventuate, and uncertainty weighed upon the market. That said, the Greek parliament voted in favour of the austerity measures from the European Union (EU) and International Monetary Fund on Thursday, and there will be more news in the coming weeks providing further clarity.

This more negative tone flowed into US markets last week, even though no new fundamental news came to light. The negative sentiment was vastly exacerbated after the market fell abruptly in Thursday afternoon trade. Speculation that a trading error occurred saw a sudden drop in the market triggered a barrage of program stop-loss selling, which saw the S&P 500 index down 8.5% at one stage. Buying quickly returned but the market didn’t have enough time to pull back all the losses , eventually ending down 3.2% for the day. The sell-off also spurred safe haven buying in gold, US treasuries and the US dollar.

The reaction last week did spark panic and uncertainty, and with the memories from two years ago still fresh in investors’ minds, many people may be asking whether we’re going to have another massive sell-off. But economies are healing from the aftermath of the economic crisis. They’re in a much better position than they were, and markets have reflected this to a large extent, however, there is still much healing to be done and there will be bumps along the way, economies are well traversed on that recovery road.

The Australian market opened sharply lower last Friday but by close of trade it had progressively recovered some of the drop and has continued to recover this morning.

Markets, remain highly sensitive to both good and bad news, which will cause significant short term volatility, such as what we are seeing at the moment. Investors like to have a degree of certainty around issues and when that is not provided, fear can dominate investment decisions.

But an investment strategy should always focus on the longer term goals rather than reacting to short term market noise, which has been exacerbated by panic and the events over the last few days and needs to be put in context of the improving bigger picture.

If you have any questions about this email or your personal situation please contact Geoff Steer or Anthony Flapper on 03 9325 6300

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About

Matthews Steer say when it comes to business, owners and managers face significant challenges. Underpinning those challenges are 4 mindsets that often need work …

  • the lack of peace of mind around their business
  • the lack of confidence to grow their businesses
  • the lack of confidence of their banker which stifles growth due to lack of access to capital
  • an inability to translate business success into personal wealth

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