Market volatility can be infectious - Raiz Invest

Inter-connected ropes

23-03-20

From George Lucas, Raiz CEO

I have been frequently asked in recent days how long this market volatility will last. The past two weeks have seen extreme volatility in equity markets, with moves (up and down) of up to 7% a day (and greater) compared with last year when a 1.5% move would have captured newspaper headlines. Now, if the market only moves 2% or 3%, it’s no longer newsworthy.

Make no mistake. If the current market volatility is not unprecedented, it’s rarely seen on this scale.  But it has happened before.

It’s not just equity markets. Market volatility can be highly infectious. Although most commentary has understandably been about the share market, it’s worth noting that this extreme volatility started in the oil market.

Two weeks ago, Russia and Saudi Arabia shocked markets globally when they could not agree on production cuts to help prop up prices, prompting Saudi Arabia, the world’s largest producer, to flood production, causing a huge decline in the price of oil.

So, at the very time the global economy is slumping in the wake of COVID-19, two major oil producers flood the market. The inevitable result saw the oil prices crash 30% in a day, sparking market volatility not only in equities, but in the currency and fixed income markets too.

In the foreign exchange (FX) market, the Aussie dollar last week fell as low as 55 cents against the greenback (US dollar) before rallying to close on Friday at around 58 cents. These are large moves for our currency.

In the three-year Australian Government bond market, yields on this government debt last week started at 0.85%, rallied up to as high as 1.60% and has fallen back by the end of last week to about 1.15%.

Certainly, this is not my first rodeo. I’ve been riding these extreme market selloffs and volatility events since the 1987 share market crash, so I know there’s no short-term remedy and it takes time for markets to calm again. Like everyone else, I wish there was a short-term fix.

That said, experience also tells me that the markets will recover in the long-term, that the record share market high of 20 February 2020 will be overtaken. I just don’t know when.

All ordinaries index since 1987
Source: Bloomberg

In what feels like unprecedented days, it’s worth reminding ourselves that other upheavals, global wars, September 11, even pandemics, such as the 1918-19 Spanish flu outbreak, has never stopped economic activity picking up and markets recovering.

As Douglas Adams (Hitchhiker’s Guide to the Galaxy) tells us, “don’t panic”. For many, this will not be the last market meltdown in your lifetime. Although, if you have a long-term plan that involves investing small amounts regularly, then you are on the right track.

Right now, I know it’s hard to focus on the long-term when the immediate future looks so bleak.

And it’s easy for me to write about how you should stick to your investment/savings. I know it’s hard to execute at the moment, but I firmly believe that if you do, it will be worth it in the long run.

 


 

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