As has been widely reported in the news, global share markets have fallen over the past few days, giving back 6% of recent gains. While this has been quicker than the usual decline, the size of the pullback is actually within the “normal” bounds of market behaviour, even when share markets are generally rising. This is something that tends to be forgotten in the media.
Investors had been favoured in 2017 with smooth returns, which has fed its way into general public expectations and newspapers’ interpretation of the recent pullback. For 2017, the US share market index (the S&P 500), only had four declines from its peak that were greater than 1%. The largest fall was only 2.8%! This smooth performance, despite a positive economic outlook, is not normal. History suggests that on average, share markets actually have a 5% pullback once per year, and a 10% decline every two years.
Not only is the recent fall well within this “normal” range, but it comes after a strong gain in January, so the S&P 500 index is still up around 1% for the year so far.
How have New Zealand shares reacted?
Closer to home the NZ share market had a quieter start to the new year, and after reopening following the Waitangi Day holiday, fell only a relatively muted 1%. This is quite typical for the local share market in these scenarios, given its more “defensive” nature.
Positive drivers of share markets are still in place
While pullbacks create volatility and fearful newspaper headlines, they often turn out to be buying opportunities when looking back, once clearer thinking prevails. Looking ahead, our assessment of the underlying fundamentals driving global share markets is that they remain very much in place:
- Economic growth remains positive;
- Business and consumer sentiment is upbeat;
- Interest rates are still supportive; and
- Corporate earnings are still growing nicely.
These key pillars are still driving markets, and it’s not just in pockets of the global economy, but everywhere from North America, to Europe, to Asia. While wage growth and inflation have been singled out in the recent pullback as areas of concern, they both remain well within the range that is generally positive for share markets.
We will of course be monitoring the situation as it develops, but the evidence thus far, would seem to indicate that this is more a buying opportunity than the severe correction news media are hyping.
If you have any questions or queries please do not hesitate to contact us.