Australian stock market: ASX 200 down 3.6% after recession fears wiped tens of billions from the stock market

How bad is this compared to the start of the pandemic and the GFC? Is the outlook going to be bleak for a while?

How bad is this compared to the start of the pandemic and the GFC? Will the outlook dim for a while?

-Mast

Hi Matt,

Our economic journalist Sue Lanin spoke to a veteran market watcher Michael McCarthywho is Chief Strategy Officer at Tiger Brokers Australia.

Michael McCarthy says yes, because rising interest rates have changed the economic and market equation.

Higher rates bring the value (prices) of assets like houses and stocks down to earth because the higher cost of borrowing makes those assets less affordable.

However, Michael McCarthy warns that “the sea change has not yet been reflected in stock prices”. So expect a lot more market volatility and more dips.

I worked as a financial journalist during the GFC and it was scary. It felt like the end of the world as we know it and the collapse of the global financial system. It was like the market was going down 10% or 9% every day.

Massive government and central bank stimulus saved the global financial system from disaster and Australia escaped a recession. During the coronavirus market collapse from late February 2020 to March 2020, the Australian market lost nearly 40% of its value. But all the massive government and RBA stimulus has helped it rebound, and more, as markets rebounded to record highs.

However, records are part of the problem. Markets are at record highs because interest rates have hit historic lows, which means you can borrow more to buy assets. The massive stimulus encouraged investors to turn to stock markets and real estate due to historically low interest rates.

But now, with interest rates rising rapidly, there is, as Michael puts it, a “radical shift”. And Michael says “the drastic change has yet to be reflected in stock prices.”

A recession is possible in North America if the US central bank continues to hike rates aggressively. Michael McCarthy and many economists say it cannot be ruled out.

And will Australia pull through? Well, the problem is that our housing market is massively indebted. So if the RBA continues to raise rates, some people could be in trouble. And we already have a trillion dollar debt to the rest of the world.

But if the RBA starts to slow rate hikes, we could manage. So let’s cross our fingers.

Lance B. Holton