Donald Trump’s tariffs and inflation threaten record run-up in shares

Shares suffered heavy falls on Thursday and Friday, closing the week at a three-month low.

Shares are now down roughly 5.5 per cent from their recent all-time highs.

“Oh, we’re trading ugly, there’s no two-ways about it,” investment firm MooMoo’s chief commercial officer Michael McCarthy said.

One of the share market’s biggest stocks — the Commonwealth Bank — fell 3.7 per cent on Friday.

“We’re changing the way we’re thinking about the future and, as we know, markets don’t price what’s happening today, the share market prices in what’s happening in the future.

“And the big problem for the Australian share market is that change in the outlook for interest rates is echoing through everything.

“I suspect what we saw in the US overnight might be just a pause and the readjustment in the US will continue,” he said.

However Mr McCarthy stressed while share market bears, or sellers, might have the upper hand, this stock rout follows an strong bull market, or run-up, in share prices.

“I think it’s important to note we’re coming from all-time highs.

“So a pull-back to 7,900 or even 7,600 wouldn’t derail the overall positive outlook and it’s important for investors to understand that,” Mr McCarthy said.

The problem, he said, is higher than-expected inflation — both overseas and in Australia.

It’s why central banks are shying away from big interest rate cuts.

He sees further, potentially steep, share market falls in coming days and weeks.

That’s because, he notes, investors have also been disappointed by the Santa rally — a traditional run-up in stock prices ahead of Christmas.

“The fact we’re heading downward as we head into that end of year does suggest that overall positioning of the market had gotten too positive.

“And I think some of that speculation about a Santa rally might have contributed to the sell-off we’re seeing now — that extended buying in the wake of the US election is now coming home to roost, and I think that talk of a Santa rally may have made some investors complacent, there always are risks in share markets.”

You can observe that “complacency”, according to fund managers, by looking at how heavily some of Australia’s biggest investors are invested in cash right now.

Low levels of cash holdings in investment portfolios, for example, point to bullish or perhaps over-confident share market investors.

“One of the concerning things to an extent is the level of cash Australian institutions are holding at the moment,” Wilson Asset Management founder Geoff Wilson told the ABC.

“They’re at very low levels. They’re just under 4 per cent.

“And, on average, they tend to hold around 8 per cent.

“So this little shake-out — it’s healthy — [but] it could well go on for a little longer.

“[It’s] the large Australian super funds [with low levels of cash].

“They’ve put more money in the market, having less cash.

“It means they’re more exposed [to a major market sell-off],” Mr Wilson said.

AMP’s head of investment strategy Shane Oliver agreed.

“I think once the share market starts falling there is a risk it could go further because selling can attract additional sellers as people panic out of the market.

“Shares remain torn between the negatives of rich valuations, higher bond yields, uncertainties as to how much the Fed will cut rates, uncertainties around Trump and geopolitical risks on the one hand, versus the positives of global central banks still being in an easing cycle, goldilocks economic conditions particularly in the US, optimism that Trump will reinvigorate the US economy and prospects for stronger profits ahead in Australia.”

Dr Oliver said share market setbacks are par for the course for younger Australia.

But, he said, while individuals need to seek tailored financial advice for their own circumstances, it’s prudent for those in or approaching retirement to closely watch their investments.

“I think it’s really about having your eyes open.

“It’s very hard to pick individual stocks.

“It’s very hard to precisely time the market.

“The key is time in the market as opposed to trying to time the market and therefore I think it makes sense to try and time the market.

“For those in or close to retirement, it’s all about getting the mix right.

“You may not want to have as much in shares.

“You want to have a bit aside in cash that you can draw on or live on through volatile periods in the share market,” Dr Oliver said.

Mr McCarthy also hosts online investment forums or community discussions on behalf of MooMoo Australia.

He said all the talk among investors revolves around two big themes: relatively high returning tech stocks and crypto currencies.

“And I can tell you every second question at the moment is about Tesla or Bitcoin.

“It’s pretty clear among individual investors that those highly speculative shares and crypto currencies have dominated the year.

“It’s not surprising given some of the strong performances in those securities that everyone’s interested to know what will happen next.

“So, really, the talk and questions are all focused on those high performing US tech stocks and the crypto currency markets,” Mr McCarthy said.

The nervous market tension is now focused on the direction of US inflation and how Trump’s tariffs might exacerbate price pressures in the global economy.

The latest reading on US inflation, published overnight, came in at a better-than-expected 2.4 per cent year on year. 

It pushed Wall Street stocks higher.