It was a busy week for the global shares, starting with hopes that this weekend tweet by Trump would be the announcement of progress in the trade war.
As it turns out, American special forces had carried out a mission to assassinate the leader of ISIS, which resulted in the first Trump tweet to have somewhat bi-partisan support.
The American sharemarket then rose to all-time high in response the US Federal Reserve’s decision to cut interest rates, more on that later! The rally was shortly lived however, as reports surfaced that Chinese officials are doubtful of a long-term trade solution with the US.
Stanford Brown Seminar
It was a great night at the Kirribilli Club last Thursday, as Nic and his two talented colleagues Marisa and Aaron gave a seminar covering tips and tricks for millennials to get ahead with their finances and career! If you weren’t able to attend or know someone who’d find it valuable, you can watch it here!
Stanford Brown Quarterly Investment Update
You can find a copy of our quarterly investment update here.
We will be rebalancing client portfolios to invest the dividends received over the quarter, but otherwise there will be no changes made to portfolios. Please call your adviser on 02 9904 1555 if you have any questions or queries.
Down, Down, Interest is Down!
To better understand the significance of the Federal Reserve’s decision to lower interest rates this week, it’s worthwhile revisiting the role of central banks and monetary policy. Debt serves an essential function for the economy, both for individuals (e.g. mortgages) and businesses (e.g. loans to invest in capital equipment like computers). The role of a central bank (America’s is the Federal Reserve, ours is the Reserve Bank of Australia) is to analyse the economy and determine whether it is slowing down or speeding up and act accordingly by adjusting interest rates.
Most economies go through boom and bust cycles, where periods of strong growth are interrupted by sharp recessions. Nic has never lived through a recession, but he hears that they can be quite traumatic, so the hope is that by adjusting interest rates central banks can smooth out the business cycle. When the economy is booming, they can slow it down by raising interest rates, which in theory leads to less economic activity because debt is more expensive. When the economy is tanking, they can prop it up by lowering interest rates, which in theory increases economic activity by making debt cheaper. Whether or not central banks have had any success in smoothing the business cycle is a contentious subject.
Both the Reserve Bank of Australia and the US Federal Reserve have lowered interest rates three times since June, a result of expectations for global economic growth lowering in response to developments such as the US-China trade war. For a number of reasons, lower interest rates are typically good for most asset classes in the short-term, which is great news if you have investments in shares and/or property! This is why you may notice that shares often trade lower after announcements of robust economic growth, as a strong economy results in investors being less likely to benefit from the sugar hit of lower interest rates.
Certainty is Absurd
In this week’s Finance 101 we felt compelled to refer to investing in property, because it has had such a good run over the last decade that many investors are forgetting that it is possible to lose a significant amount of money in property. Here are four headlines from the ABC’s 7:30 report in the last two months.
Investors don’t get in trouble by investing in risky assets – if you don’t take any risks you will never get a decent return. Investors get in trouble when they overpay for an asset because they underestimate the risks they’re exposing themselves to (or in some cases, are aware of the risks but hope that it will all pan out!). This is especially true with property, because if you have a mortgage you may not be able to hold through a downturn thanks to your lender foreclosing you.