share market volatility - investment market prospect

Share market volatility

Share market volatility is the reflection of the price action on a daily basis: price action reflects the trades that have been conducted during each day. Trades are made by market participants (traders, as well as investors) based on their portfolio needs, influenced by their perception of the state of the companies in which they deal.

For some of the participants, their perception is based on research and analysis of a range of factors regarding the companies in which they intend to invest (some refer to this as a ‘bottom-up’ approach); for some others, it is based on their analysis of the industry and the economy (also referred to as a ‘top-down’ approach); for yet others, it is based on rumour and speculation (we consider this to be ‘unwise gambling’); then there are the technical analysts – and of course, the little understood, algo-traders (who develop computer models – or algorithms – to analyse all sorts of information and make trades according to momentum and opinion.

Whilst all of this is happening, businesses proceed, industry continues and the economy does what the economy will do: in a ‘perfect world’ share prices should be reasonably predictable if able to be based on economic fundamentals (sales, margins, profits, capital intensity and cashflow).

The Global Financial Crisis (the GFC) was a rude awakening that investment markets don’t operate in isolation: the share market interacts with the capital markets (Bonds, credit etc), as does property – the three traditional investment asset classes.

The share markets recovery: first anniversary

As at the first anniversary of the turn-around from the GFC in the equities markets in March 2009, the Australian share market (All Ords) was up over 53% for the twelve months to 10 March 2010; and the Dow Jones was up (in their local currency) around 70% in the same period.

Whilst acknowledging that the share market is meant to anticipate economic change (and price it in), do any of us believe that the economy had lifted by these factors during this time? If we are skeptical of that being the case, then why had the investment markets made such a significant recovery?

What drove the size of the market recovery?

A couple of points that feed into that, are:

  • the sharemarkets ‘over-shot’ on the way down (fueled by panic experienced by investors – particularly those using gearing to make their investments);
  • substantial publicly-funded stimulus had been injected into the economy, mainly through central banks easing interest rates and making funds available through bond issuance – but also through fiscal stimulus created by government spending programs (in Australia, including the ‘school halls’ and ‘pink bats’ programs); and
  • there has actually been some robustness in economies.

What fueled the market recovery continuation?

There were a couple of interesting characteristics about ‘investor-land’ at the first anniversary date:

  • there was still a substantial holding of cash waiting to find its way (back) into investment products; and
  • returns on government bonds were so meager that investors who need an income (mostly retirees), needed to seek income, even at higher risk.

…and so the substantial amount of cash in the wings, accompanied by the selective appetite for calculated risk into the share market – in an environment whereby profits were being reported; those profit results exceeding forecasts (and analysts estimates); economies growing (albeit slowly); companies were accumulating cash reserves (and are being called on to distribute that by way of dividend or share buy-backs); confidence gradually returned – to businesses, consumers and financiers.

Near-term market outlook

Our previously-expressed expectations for the 2010 year were for:

  • growth in shares and to a lesser extent, property;
  • increasing interest rates for the balance of this financial year;
  • reported (diversified) portfolio growth for this calendar year, of high single-figure to low double-digit percentages.

Share market volatility

Share market volatility is a characteristic of this particular market: it is most noticable because it is so frequently reported – and so publicly reported. At the close of each day’s trade, news reporters make much of which direction the markets moved for the day – and delight in announcing the billions of dollars ‘wiped off” the market on a down-day. (Cynically, it is noted that there is rarely any mention of the billions of dollars added to the market on an ‘up-day’.)

As is apparent to most of our readers, share market volatility is only an issue for those who participate in the trade for that day or sequence of days: long-term holders of shares can rule out the jagged lines (of volatility) between the date of purchase and the next relevant date of measurement (perhaps at year-end, an anniversary, a restructure, or perhaps at sale), replacing them with a straight line between the relevant points. For such an investor, there is little, or no volatility to be concerned about.

Reaction to share market volatility

Regardless of the phase of the market, your investments can – and should, be focused on your lifetime wealth management goals and objectives: this should be undertaken strategically, preferably with professional advice from experienced advisers who can ensure your best interests are served in spite of what is happening with/ for other investors (who have their own individual circumstances to consider when making their investment decisions).

If your portfolio could do with a review and some strategic advice phone 07-34213456, or use our website contact us facility and our friendly, efficient office staff will arrange an appointment for you with one of Continuum Financial Planners’ experienced advisers. We work to the mantra that: ‘we listen, we understand; and we have solutions’ … that we deliver in personalised, professional wealth management advice.

(This post was originally published in May 2010: it has occasionally been updated and refreshed, most recently in January, 2019.)