Keeping an Eye on the Global Economy

The Dow Jones fell in January, prompting concern from some corners
Photo: Charlie Phillips

The year has started with some caution after early wobbles on Wall Street.
 
The Dow Jones Industrials Index has now fallen 4.5 per cent for the month of January and 6.5 per cent for the year to date. That is the worst result for a new year since 1982.

There is a hypothesis going around that stock market performance in January (particularly in the US) predicts its performance for the rest of the year. So if the stock market rises in January, it is likely to continue to rise by the end of December. 

“Falling share prices… make the populace, on average, feel poorer.”

And of course, the same would be true in reverse – if the market has a bad month in January, it can set the scene for a particularly bad year.

Fortunately, this theory does not hold true as much as it once did.

Nevertheless, global stock markets have always been a major barometer of the state of global economies.

How Does This Relate to Residential Real Estate in Australia?

Well, for starters, falling equity markets around the world can really damage confidence in our domestic economy.

How so? Falling share prices mean there are more and more people having their wealth cut back. They no longer have as much money in superannuation as they previously did. And direct holdings of shares are no longer worth as much as they used to be.

That makes the populace, on average, feel poorer.

This perception means one is less likely to spend money, whether that be on consumer goods or investment housing. Read up on the wealth effect for more information.

“Global stock markets have always been a major barometer of the state of global economies.”

Now, it has been well documented that the current recovery in the national housing market has largely been investor-driven. Funnily enough, it is investors who tend to run to the hills when there is the first sign of trouble.

The second way it affects the housing market here is that, while there are wobbles on global equities markets, it is very unlikely the RBA would lift rates during such a period.

Instead, I believe the RBA will most likely keep rates on hold for the duration of the year, even while there might be some shorter term concerns about possible rising inflation.

The RBA knows there still isn’t that much confidence in the local economy and so even while there have been some recent signs of rising inflation, they may well accept slightly higher inflation in order to maintain growth and stabilise confidence – for now.

So, while stranger things have happened, in my opinion investors have little to fear in interest rate movements for the moment. However, they may wish to keep one eye on the global economy.