Calm the farm: US economic fears overblown

The Australian share market experienced losses of $100 billion over two days in early August because of fears of a US recession. But how likely is the economic threat really and, ultimately, will the markets care?

Global markets melted down because of some worrying unemployment data coming out of the US, sparking fear the economy is headed for recession.  Common wisdom says by the time the media start talking about recession, there already is one.

US economy robust

But the US economy is growing. Granted, it slowed down in the first quarter to an annualised rate of 1.4 per cent.  But in the three months to end June, the US economy grew at an annualised rate of 2.8 percent.

The number of non-farm unemployed increased by 114,000 in July but on the back of record numbers of immigrants in 2023, that's to be expected. Besides, with an unemployment rate of just 4.3%, the US economy is still theoretically running at full employment.

Emotions and the share market

But in the short-term that may not matter to the share market. Emotions are running high, and when emotions run high, fears can become self-fulfilling.  The Volatility Index is an established way to measure investor sentiment.  Its popular name is the Fear Index or Fear Gauge.

In early August, the Fear Gauge shot up to 65, a level not seen since the height of Covid and before that the Global Financial Crisis.

Perception is reality

When it comes to the sharemarket, unfortunately perception often disconnects from reality.

For retirees, all the intelligent investor can do is wait and ride out the short-term price fluctuations. You don’t want to sell high quality assets at depressed prices. That destroys your wealth.

Better still, there may be buying opportunities, where previously expensive stocks may become affordable.  As Warren Buffet said, “I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.”

If you’d like to learn more about how to invest during periods of high volatility, give us a call. We would love to help.

-        Daniel Crump is an independent financial adviser

 This article is general and does not consider your personal circumstances so it may not be appropriate to you.  If you would like advice specific to you, please let us know at daniel@danielcrumpfp.com.au