NEWS + VIEWS – 14/03/2025
MARKETS
The US S&P 500 index is down around -10% from its peak in February and the ASX 200 has mirrored those falls. A more than 10% fall is classed as a correction. European stocks are also well down but less than US and Australian markets, which probably reflects a bit of ‘catch up’ to the outsized gains in the US over the last year or so.
Falls of this size are not unusual and we usually forecast one in our annual predictions, particularly when markets have been strong the previous year. They can, but not often, morph into falls of a significantly greater magnitude.
Once markets reach a bottom, a rebound can be strong until some investors take the opportunity to rebuild cash reserves. That can mean recent lows can be tested several times until a more sustained recovery occurs.
What is the catalyst for a rebound? The answer is unknown. It could be time (on average, these selloffs last around 18 days in the first wave of selling), the resolution of geopolitical concerns (e.g. Ukraine), shares becoming cheap, or panicked sellers stopping the selling of their shares.
SHARE MARKET VOLATILITY
Fear index elevated
The Chicago Board Options Exchange’s Volatility Index (VIX), which measures the 30-day expected volatility of the S&P 500 index and sometimes called the ‘fear index’, has risen significantly in March. While elevated, the market is probably still in ‘investable territory’. On Wednesday night, it eased to 24 from 28 the previous night after reasonably good US inflation data was released.
Source: Cboe
Why has the market been sold off?
Share markets had been rising strongly over the past few years and were looking expensive. While they can continue to rise, it does make them vulnerable to ‘bad news’.
The bad news this time is that investors had expected the Trump administration to use large tariff increases as a negotiating tool to gain some concessions. In fact, the tariffs have been imposed with little to no softening. Also, they have been imposed almost universally rather than targeted (to particularly egregious trade barrier countries such as China).
The reason for the strict and broad approach is probably related to the large company tax cuts promised in the election. The US government needs the revenue from tariffs to minimise the impact of tax cuts on the US deficit.
Inflation
Significantly, increasing tariffs is almost by definition inflationary. Add to this undisciplined government spending by most countries, including ours. For example, German bond rates jumped the most since the 1990s after the government said it would borrow above its 1% of GDP debt limit to spend on defence and infrastructure. Other countries are running much larger deficits.
All of this feeds through to inflation, which in turn deters investors unless they can see economic or company growth offsetting the effects of inflation.
Earnings forecasts have trended down in Australia
The chart below shows a further catalyst for the domestic sell-off. Company earnings have set a weaker trend since 2023 and forecasts for future years have been downgraded. This reflects the productivity declines in Australia.
Companies going ex-dividend have accentuated the falls
The chart below shows that around $40 billion of dividends will be paid over March and April. When companies go ex-dividend, their share prices generally fall by a similar amount. Many companies that have gone ex-dividend over the past few weeks (major exceptions being ANZ, NAB and WBC) are partially responsible for weaker share prices. A countervailing point is that the extra cash needs a ‘home’ and can provide some support for share prices at some stage.
Commonwealth Seniors Health Card (CSHC)
The CSHC is available to many more people than one might think. The main benefit of the card is the lower cost of medicines and medical services. Some states offer additional benefits.
Eligibility is restricted to those of Age Pension age, who are resident of Australia, not receiving other support payments and meet the income test.
An income test is applied when determining the eligibility for the card with a limit of $99,025 for singles and $158,440 for couples. In calculating income, financial assets such as an account-based pension and shares are ‘deemed’ to have earned:
For singles, the first $62,600 at 0.25% and anything over $62,500 at 2.25%.
For a couple where one already receives an Age Pension, the first $103,800 of your combined financial assets, the deemed rate of 0.25% is applied. Anything over $103,800 is deemed to earn 2.25%.
For a couple where neither is receiving an Age Pension, the first $51,900 of financial assets has a deemed income of 0.25% per year. Anything over $51,900 is deemed to earn 2.25%.
Source: Services Australia
The rules can be a bit more complicated in some circumstances.
In summary, one can have substantial assets and still qualify for the CSHC. If you are unsure whether you are eligible, we recommend contacting Services Australia or discussing with your adviser.
Gerard O’Shaughnessy
P 0423 771 330
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