As you will all be aware, the share market has been declining for some weeks. At the moment, the outlook remains clouded, but we are concerned that this decline may have further to go in the short term, especially in overseas share markets. In our judgement, it is better to be cashed up in these conditions, just as we were during the GFC.
Most of our forecasts made this time last year have proved right, except one. As predicted, the A$ has fallen further, commodity prices and resource stocks have continued to decline, US interest rates have started rising, and world growth has continued. However, we also forecast a “moderate” rise in the share market. Instead the All Ordinaries index has fallen about 5% over the year.
So why has the Fed raised interest rates and what does that mean for investment markets?
The US fed funds rate (their version of Australia’s cash rate) has been close to zero since the GFC,
All sorts of indicators suggest that world growth is picking up. In the US, Q1 weather-related weakness has reversed; in Europe, stimulus via QE (Quantitative Easing) and a zero cash rate has finally kick-started growth; in India growth is picking up; leading indicators we watch point towards global recovery.
It is an accepted orthodoxy in economics that inflation is A Bad Thing. This is because the price system is an extremely clever invention which provides information to market participants on how to reallocate consumption and production, and it does this without any central control or guidance. The different prices within the overall economy are derived from the interaction of consumers and producers, from the workings of the system itself.