How Interest Rates can Affect Volatility - Raiz Invest

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After a strong rise in the US market over the last 6 months (nearly 7% in
January alone), investors have been caught by surprise due to the strength of
recent inflation reports (yep the US economy is doing well), and therefore
increased speculation that the US Fed could raise interest rates more
aggressively than had been expected. This is the catalyst for the recent
fall.

So
why does the rise in interest rates affect equity markets?

 

Company
earnings & consumer spending

Equity
investors see increasing inflation as an indication that interest rates may
push higher, which could lead to a slow down in company earnings and
consumer-spending power. As both companies and consumers may need to pay back
more on any debts they hold as interest rates increases, rising interests rates
may eventually in a year or two slow down the economy and help to balance
growing inflation. Equity markets take this into consideration when valuing
equities, looking this far into the future.

At
the moment though, the fear of rising interest rates in the market is on the
back of expected improvements in the global economy. News on the global economy
looks set to remain positive in the coming months.

 

Profit
taking

Prior
to this sell-off, the US market had not fallen 3 percent from any high in more
than a year. Therefore, investors are also seeing this as a catalyst to start
some profit taking. This is usual market action and usually referred to as a
correction or pull back.

 

Market
Cycles

Despite
the recent fall, the U.S. stock market has proven remarkably resilient; it
routinely has recovered from these short-term events to move higher over longer
time periods. This is not to say it will always recover but history shows by
staying invested no matter the market conditions, investors can keep their
portfolios on track in pursuit of their long-term goals. These market cycles
are completely normal, and has still been up over the long-term picture.

 

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US Markets have pulled
back to November pricing, but is still up over the long-term picture.

 

Why
does this affect Australian Markets?

They
say “When the US market sneezes, the rest of the world catches a cold.”

As
the US is the world’s biggest economy (for now), good market news from the US
is usually good market news for markets globally, including Australia. Bad news
from the US also signals vis versa across global markets. A change in the US
economy usually has a global effect in most other economies affecting
businesses, import/export trades and currencies.

The
Australian Stock Exchange (ASX) is typically correlated to the US stock market.
You will notice that the opening level of the ASX is often influenced by what
the US markets did the previous night. Another consideration is that a large
majority of Australian shares are also owned outside of Australia.

However,
while we expect Australian markets to follow US market movements, we don’t
expect them to fall as much the US markets as they have not risen over the last
few months as quickly. While US markets will continue to influence our market,
it will still eventually move independently based on both global and local
economical factors closer to home.

Please
remember markets go up and markets go down. This is completely normal. The Raiz
philosophy is to invest small amounts regularly, no matter the market
conditions. Stick to your savings plan and these moments could be an
opportunity. You can learn more about this from our blog on the advantages of Dollar Cost Averaging here.

 


 

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The information may be based on assumptions or market conditions which change without notice. This could impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz Invest or Raiz Invest Super.

Past return performance of the Raiz products should not be relied on for making a decision to invest in a Raiz product and is not a good predictor of future performance.


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