What a Tuesday for the Aussie market.
The S&P/ASX 200 [XJO] finished 3.2% lower.
The severity of the drop caught me by surprise. The US market may have fallen 4% the day before. And the Aussie market does take its cues from the US. But 3.2% felt like an overreaction.
Check this out:
S&P/ASX 200 [XJO] hourly/daily chart
Source: Yahoo Finance
[Click to enlarge]
On market open, the XJO dropped a whopping 156 points in minutes. It fell a further 30 points over the course of the day.
What makes it an overreaction?
The XJO is up 23% in the past two years. In the same time, the Dow Jones is up 64%. And it’s a similar story with the S&P 500, which has risen by 50%.
When comparing US and Aussie markets, the XJO hasn’t moved as high as the major US indices. In fact, both the Dow and S&P 500 have doubled the gains of the ASX in the same time.
That makes the intensity of the XJO fall surprising. Since US indices have risen higher, they have a bigger cliff from which to fall.
Nonetheless, the media loves to scaremonger. Headlines about massive market falls get clicks.
Of course, headlines talking about short-term drops do nothing but frighten people. Yet, ultimately, that’s market noise that investors need to tune out.
To prove a point, the S&P 500 was up 1.74% yesterday. And the Dow rallied 2.33%. And just like that, investors ‘swept’ in, putting the short-term pullback behind them.
Regardless, it could be a bumpy couple of days for the Aussie market as it rides out reactions in the US. However, the bull run for US markets isn’t over yet.
RBA’s ‘Gradual’ progress
Much closer to home, another year of Reserve Bank of Australia (RBA) policy meetings begins.
The latest minutes release from the RBA was so uneventful that the XJO dropped about seven points in the aftermath. And that’s on a day in which investors were dumping stocks.
To be fair, this was widely expected. But not even a double-digit move on a volatile day was slightly unusual.
However, we can now sit back and let the media begin overanalysing when the RBA will make a change.
The RBA has kept interest rates at 1.50% since August 2016. By historical standards, that’s a very long time in which we’ve not seen any change.
Towards the end of last year, the consensus among economists was that the RBA would increase rates this year. Unemployment is down, inflation looks like it might reach the RBA’s target, and property values may decline a smidge. Moreover, if the US Federal Reserve continues jacking up rates, logic follows that the RBA would need to as well.
The collective view was that rates would begin to rise around August this year. Suddenly, after yesterday’s statement, it appears the consensus view is now pushing that to November.
Yet I’m still not convinced the RBA will raise rates at all this year.
The RBA remains upbeat about the Aussie economy. It still expects gross domestic product (GDP) to be above 3% this year. And inflation to be above 2%. RBA Governor Philip Lowe noted:
‘Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
‘The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected.
‘A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
‘Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.’
In my view, the RBA is a little too upbeat about economic conditions at present.
Given that the wage price index has been declining for nearly three years, that’s not a trend that turns around on a dime. Furthermore, the strong employment data the RBA is making its decision on could be a one-off. Almost 50% of jobs created last year went to the public sector. And almost three quarters of that were in the health sector.
Putting all the bets on strong — and perhaps temporary — labour growth is risky. Especially when household debt levels are nudging 200%. And the cost of essentials is rising.
In addition to this, the government and RBA don’t always get the growth forecasts right. Those forecasts rely heavily on commodity prices and consumer spending. Commodity prices are at the whim of global market demand. And the consumer is crucial to GDP, contributing 57% to GDP. If spending drops, so does GDP.
Things aren’t rosy. And, in my view, it’s unlikely we’ll see rates rise this year. ‘Gradual progress’ may be the positive spin the RBA felt the market needed at a time of uncertainty. But it’s nothing more than lipstick on a pig.
Editor, Markets & Money