If you thought the rollercoaster ride on the ASX was over, think again.
Despite today's 0.3% fall on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), investors should get used to changes of 1%, 2% or more on a regular basis and here's why.
Global events are driving markets, and the fact there we are experiencing a number of separate issues makes volatility all the more likely. Here's just a few of those factors:
- Growth in China. Fears around the globe are that the world's largest developing economy is slowing. Despite official government statistics showing China's economy growing at around 7%, many analysts and commentators also don't believe the figures are 100% accurate. China consumes much of the world's raw materials and also produces much of the world's products from said raw materials. The fear is that as China growth slows, it will have an effect globally.
- US Fed raising interest rates. Markets are fearful that the US central bank will raise interest rates and the US economy, which has been recovering, will falter and perhaps turn negative. But given the possible rate rise is likely to be tiny, it's unlikely to have a major impact by itself. The problem is that markets fear the unknown and rising interest rates after six or so years of flat, nearly zero interest rates, could see confidence sink.
- Greece and Europe. Fears over Greece's stay in the Eurozone remain. The country's two dominant politicians have reportedly refused to work together, casting doubt over whether a stable government can be formed following new elections.
- Australia's economy. Locally, many commentators are fearful that Australia will be negatively impacted by the event above, particularly China and slide into a recession.
- Political uncertainty. The recent win by Malcolm Turnbull of the Liberal Party leadership should give business more confidence, but the fallout from a change of leadership could hang around for some time.
- Domination of the ASX by a few companies. With the big four banks, 2 retailers and 3 major resource companies accounting for a big percentage of the whole market on their own, sector specific factors – such as recent capital raisings by Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), can have a major effect on the market.
The biggest issue facing markets is that the above factors can affect the markets in different ways on different days. On some days combining to cause major movements in the market, other days offsetting each other. But on any day of the year, in any year, you could easily list 6 factors influencing the markets – there's always something for markets to worry about.
Foolish takeaway
The key strategy for investors is not to panic sell during the down days, as you could miss out the day after when the market recovers. Buy and hold investors can just ride out the volatility and use those down days to add to their quality holdings – which is what I'll be doing.
