The current share-market volatility being experienced in global markets, particularly in the U.S. but also here in Australia is concerning for some.... but, what is the cause?
Recent higher than expected wage growth in the U.S. and strong employment rates have led to fears that the Federal Reserve (the USA’s Reserve Bank) will be more aggressive with interest rate hikes in 2018. The result of this is that the U.S. 10-year treasury bond rate has touched a 4-year high return (currently 2.83% return). When investors are able to receive almost 3% return in a relatively low risk investment like treasury bonds, some will move money from more volatile shares into the relative safety of bonds. Shares over the long-term create more wealth than fixed-income bonds, but they are more volatile and have more risk. As the federal bonds are a fixed-income investment, we are seeing people moving money in and out of the bonds as they do not wish to be caught in a fixed income investment on a lower rate - as the bond rates increase.
This volatility represents a reaction and adjustment to good economic news in the U.S. and other global economies. Pull-backs are a normal part of long-term investing.
Recent volatility also raises the question of taking advantage of the possible value available in the markets at the moment.
A good time to speak to your adviser.....