How bad is it when compared to the start of the pandemic and the GFC? Is the outlook going to be grim for a while?
How bad is it when compared to the start of the Pandemic and the GFC? Is the outlook going to grim for a while?
Our business reporter Sue Lannin has been talking to veteran market watcher Michael McCarthy, who is chief strategy officer from Tiger Brokers Australia.
Michael McCarthy says yes, because rising interest rates have changed the economic and markets equation.
Higher rates are bringing the value (prices) of assets like homes and shares down to earth because the higher cost of borrowing makes these assets less affordable.
However, Michael McCarthy warns “the sea change has yet to be reflected in share prices.” So expect much more market volatility and more falls.
I was working as a finance journalist during the GFC and it was frightening. It felt like the end of the world as we know it and that the global financial system would collapse. It felt like the market was falling 10 per cent or 9 per cent every day.
Massive government and central bank stimulus saved the global financial system from disaster and Australia escaped a recession. During the coronavirus market meltdown from late February 2020 to March 2020, the Australian market lost nearly 40 per cent of its value. But all the massive government and RBA stimulus helped it bounce back, and then some, as markets rebounded to record highs.
However, the record highs are part of the problem. The markets are at record highs because interest rates have been at record lows, which means you can borrow more to buy assets. The massive stimulus encouraged investors into share markets and property because of record low interest rates.
But now as interest rates rise rapidly there is, as Michael says, a “sea change”. And Michael says that “sea change has yet to be reflected in share prices.”
A recession is possible in North America if the US central bank keeps raising rates aggressively. Michael McCarthy and many economists say it can’t be ruled out.
And will Australia get through it? Well, the problem is our housing market is massively indebted. So if the RBA continues to raise rates then some people could be trouble. And we have are already $1 trillion debt to the rest of the world.
But if the RBA starts to ease up on rate rises, we may muddle through. So fingers crossed.
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