Market roundup: Ongoing volatility, so look to the long termMarket roundup: Ongoing volatility, so look to the long term

This month, we’re joined by Scott Phillips, The Motley Fool’s Chief Investment Officer in Australia, Sherifa Issifu, S&P Dow Jones Indices’ Index Investment Strategy Associate, and Brendan Doggett, Sharesies’ Australia Country Manager.

What’s been happening in the Australian share market?

Scott Phillips (The Motley Fool AU)

Well, if we weren’t sure what to expect from higher interest rates, we do now: volatility. The Australian Securities Exchange (ASX) is down almost 9% over the past month as traders place their bets. And I use the terms ‘traders’ and ‘bets’ deliberately—‘investors’ know that investing is a long-term pursuit. It’s never fun seeing your portfolio whipsawed by overexcited traders, but volatility is the price we pay for a ticket to the dance.

Over the past month, technology companies’ shares have led the declines, mirroring those in the US, with the Australian technology sector down 22%. Mining companies have fallen 12% as the price of iron ore and other minerals have retreated. The real estate sector (the most directly impacted by rising interest rates, as commercial valuers use rents and interest rates to compute the value of office, retail, and other real estate) has fallen 11% over the past month.

Sherifa Issifu (S&P Dow Jones Indices)

March's respite from share market declines ended with the S&P/ASX 200 declining 1% in April. The S&P/ASX 200 VIX® crossed 20 in May, spiking to 21.41, meaning that the expectations of future volatility in local share markets is increasing. 

Utilities stocks led amongst Australia’s blue chip sectors rising 9% last month, and is now hot on the heels of the energy sector for the title of the best performing sector in 2022.

Brendan Doggett (Sharesies)

The Reserve Bank of Australia (RBA) raised its target cash rate by 0.25% to 0.35%—the first rate hike since the pandemic.

This rise was higher and earlier than expected, but was driven in part by inflation picking up more quickly and reaching a higher level than expected. The RBA has positioned it as a positive sign for Australia post-pandemic. The Aussie economy has been very resilient, with further economic growth predicted and unemployment expected to reach its lowest level in nearly 50 years. 

For investors with a long-term mindset (vs. day traders), this might have some influence on how to understand what the potential is in the Australian share market over an extended timeframe. 

What’s been happening in international share markets?

Scott Phillips (The Motley Fool AU)

While the NZX50 (New Zealand’s primary share index) is down 6% over the last month, and the ASX is off by 9%, the S&P 500 has dropped 11.6%. 

That fall is now 18% since 1 January 2022—likely a response to rising inflation (which boosts costs and can hurt profits) and interest rates (which makes it more expensive to borrow, and harder for companies to raise money from investors to fund growth). It also means that loss-making businesses are worth less, because the ‘cost’ of waiting for profits to arrive is higher when interest rates are higher.

Many large technology companies have had the worst start to the year in their histories, share-price wise, with many of the older ones having their worst year since 2008. Remember that we’re talking share price here, not actual business performance—which is what’s going to matter over the long term.

Sherifa Issifu (S&P Dow Jones Indices)

The micro-cap S&P/NZX Emerging Opportunities provided one bright spot in April, rising 1% as the only index across capitalisation ranges on both sides of the Tasman Sea to end the month higher. 

April was a negative month across the board, with all S&P Developed BMI countries declining.  So far this year, US and international markets have been falling in tandem. 

In the US, information technology, consumer discretionary and communication services (home to Apple, Amazon and Meta Platforms) declined more than 10% a piece in April, driven by a volatile earnings season for the tech giants. To put this into context, the market capitalisation lost by the top five firms in the S&P 500 during this global sell-off (peak to trough) is equivalent to the entire share market capitalization of the UK.

Brendan Doggett (Sharesies)

Inflation remains high. Supply chain disruptions caused by the pandemic and Russia’s invasion of Ukraine have driven commodity prices higher. Recent lockdowns of some Chinese cities add the potential to disrupt global supply chains further. This means more rising interest rates. 

Along with AU, central banks in NZ, UK, and the US have all moved to scale back economic stimulus to tackle inflation—leading to volatility in the share markets as investors react to the news. 

In the US specifically, earnings season is underway. Some big tech companies like Amazon and Netflix have missed expectations, which impacted the markets as well and caused further volatility. In NZ, many New Zealand-listed businesses had March year-ends, so keep an eye out for a number of results that get announced in May.

Are there any key themes or trends you’re seeing?

Scott Phillips (The Motley Fool AU)

Trends remind me of the joke about a bloke who asked his mate to check if the car’s blinkers were working. His mate’s response? “They’re working, they’re not working, they’re working, they’re not working…” In the share market, trends (particularly price trends) can be like trying to drive a car by looking in the rear vision mirror.

It’s often the case that the best investments you can make are when you feel most pain because your portfolio can be sharply down. Investors need to be able to partition their brain to separate the pain of falling prices of what they own from the potential of picking up a bargain when buying things they don’t yet own. 

Watch business trends instead: companies attracting more customers, designing new products, offering new services. That’s how long-term value is created. 

Sherifa Issifu (S&P Dow Jones Indices)

My team monitors markets daily, providing regular commentary using S&P DJI indices. A major trend over the last two years has been the reminder that change is constant. As John Authers described in a recent note, markets are in “helter skelter” and I’d echo that sentiment: one minute, markets drop into correction territory, and the next, they recover vigorously.  

Alongside the peaks and troughs, thematic strategies have been a focus, especially among investors who want to take a values-based approach to investing with inflows increasing in ESG-related products according to ETFGI. In a recent paper, my colleague Barbara Velado examined the Australian ESG index landscape and concluded that a collection of ESG-focused indices would have led to substantial ESG and carbon improvements while closely tracking the baseline collection of indices. 

Brendan Doggett (Sharesies)

Seeing headlines about the global economic growth rate slowing can feel scary. But this doesn’t mean approaching the markets with doom and gloom. At our inaugural Share Club event in Sydney this month, the other panellists (Scott and Queenie from Invest with Queenie) and I chatted about the benefits of keeping an eye on the horizon versus what’s directly in front of you. 

It can be easy to get caught up in the day-to-day ups and downs of the markets. But over time, we’ve seen a rise in the share markets, and these moments of downturn look smaller and smaller on graphs when evaluated over a lifetime. Take the Vanguard Index Chart—the COVID-19 drop of March 2020 looks much smaller when mapped out over a 30-year period. 

So as always, long-term investing and goals are important to keep in mind. It’s not to say to ignore what’s going on, but if an investor believes in their investment choices and the overall potential and future, then don’t lose sight of that in the day to day. 

Wrapping up

That’s all for this month’s roundup. If you’re on the lookout for more resources to help you learn about investing, make sure to check out our Learn articles and subscribe to our Lunch Money market newsletter. 

Scott Phillips, The Motley Fool Pty Ltd (The Motley Fool) and S&P Dow Jones Indices LLP (S&P Dow Jones Indices) are not associated with Sharesies AU Pty Ltd or its related companies. Views expressed by Scott Phillips, The Motley Fool, Sherifa Issifu and S&P Dow Jones Indices are their views and Sharesies does not endorse the views they represent. If any financial product or stock has been mentioned, you should obtain that product's disclosure documents prior to any decision whether to acquire the product.  Information provided is general only and current at the time.