WWN#41 – Aussie Stock Market Plunges: Should You Buy, Hold or Sell?

ASX200 February Fall.png

Source:  Yahoo Finance

What’s Been Happening?

At the beginning of February, the benchmark 10-year bond yield rose to a four-year high on the back of positive payroll data being released in America. With wages rising and unemployment falling, the data acted as a signal to many that the U.S. was inevitably about to start increasing interest rates.

A week prior to the news, the Dow Jones Industrial Average had its highest closing record of 26,616.71 set on January 26. This meant investors were already quite cautious of a pull-back and inevitably the release of positive economic data triggered an immediate sell-off in the stock markets there and around the world.

After falling slightly on Monday, the Australian stock market had one of their worst trading sessions with $56 billion in value wiped off the stock market on Tuesday. The S&P/ASX 200 dropped 3.2% which makes it the worst one day fall since September 2015. There was some reprieve on the following day as bargain hunters came in and stabilised the market which recovered about 1.2%.

What Now?

On Thursday night, the sell-off on Wall Street deepened and the Dow Jones Industrial Average lost 4.2%, taking the losses since last Friday past 10 percent, the definition of a correction. That led to renewed selling on Friday for Australian shares, albeit it was only a 0.9 percent drop to finish the session at 5838 points. Over the week, the cumulative losses add up to 4.6% and the total value of the Australia sharemarket has dropped by more than 70 billion.

What’s Next?

Is it time to buy? Focus on the Fundamentals

Head of equities research at Morningstar, Peter Warnes, has commented that: “It’s way too early to go bargain hunting” as there will be reliefs but more downside is likely to develop over the next few weeks. Investors are likely to wary as volatility remains high.

Having said that, stock market pull-backs can be an advantageous time for investors to pick up stock more cheaply. During periods of volatility, individual stocks are more likely to outperform the market especially as the reporting season has begun in Australia and companies have started to report their half yearly earnings.

Is it time to hold?

Currently, we are in correction territory and corrections are generally temporary in nature. Although the U.S. political situation is a mess, the U.S. economy is actually doing fine (higher wage growth and lower unemployment) and therefore there is no definitive cause to be alarmed. Unless you have reason to believe that a stock will never reach that price again, it would be silly to sell now and lock in losses.

Is it time to sell?

Now is not the time to panic sell. Compared to overseas markets, the losses sustained in the Australian stockmarket are mild. It’s still $44 billion ahead of where it was this time last year and $220 billion ahead of where it was three years ago. Furthermore, even if there are a couple of rate rises, the interest rate is still relatively low in historical terms. In Australia, reporting season has only just begun and there are expectations that corporate earnings should rise by about 7% or so which should support stock prices that have not risen as sharply as in the U.S.

In Warren Buffet’s memorable words: “Be fearful when others are greedy and greedy when others are fearful.”


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