A long period of calm markets ended in early February with share markets in the US, Australia and around the world falling dramatically.
At the lowest point the the Dow Jones Industrial Index was down 1597 points - a 6.4 per cent fall. By the close on February 5 the US market had reversed more than all the gains since the start of the year.
With the US the biggest share market by a large margin, global markets are heavily impacted by the US, so it wasn’t surprising Australian shares followed suit with share prices falling across all sectors. Since then markets have shown some signs of stabilising.
So what happened? January 2018 was a time of record inflows into global share markets with investors pushing many sought-after assets into ‘overbought’ territory. This meant the market was vulnerable to any real or perceived bad news.
The US released some key jobs data lwhich showed wages were growing at a faster pace than expected. This meant investors feared the US Federal Reserve (the Fed) may raise interest rates far more quickly than anticipated.
Raising interest rates are typically a negative outcome for shares as investors worry about the outlook for the economy and company earnings, typically preferring cash and bonds.
To put the fall into context, 2017 was not an ordinary year. The S&P 500 returned 19.42 per cent and had been within 3 per cent of an all-time high for an incredible 202 straight days due to abnormally low volatility.
This is almost twice as long as the second longest streak which occurred from 1995 to 1996. Periods of such calm are bound to end at some point, but it’s awfully difficult to know just when.