The Times Australia
The Times World News

.

Financial markets are tanking. Here’s why it’s best not to panic

  • Written by Luke Hartigan, Lecturer in Economics, University of Sydney



Financial markets around the world have been slammed by the Trump adminstration’s sweeping tariffs on its trading partners, and China’s swift retaliation.

Share markets have posted their biggest declines since the COVID pandemic hit in 2020, as fears of US recession surged. Iron ore, copper, oil, gold and the Australian dollar have all tumbled.

On Wall Street, leading indices[1] have fallen around 10% since the tariffs were announced, while the tech-heavy Nasdaq is down 20% from its recent peak. European and Asian markets have also slumped.

In Australia, the key S&P/ASX 200 slid another 4.2% on Monday to levels last seen in December 2023, taking its three-day losses since the announcement to more than 7%.

Why are markets reacting so badly?

Financial markets reacted so negatively because the tariffs were much larger than expected. They represent the biggest upheaval[2] in global trade in 80 years.

Many traders were hoping the tariffs would be used mainly as a bargaining tool. But comments[3] by US President Donald Trump that markets may need to “take medicine” seem to suggest otherwise.

The tariffs are expected to weaken economic growth in the US as consumers pare back spending on more expensive imports, while businesses shelve investment plans. Leading US bank JP Morgan has put the chance of a US recession[4] as high as 60%.

This comes at a time when the US economy was already looking fragile. The highly regarded GDPNow model developed by the Atlanta Federal Reserve Bank[5] indicates US March quarter GDP will fall 2.8%, and that was before the tariff announcement.

Worries about global growth

Fears of a recession in the United States and the potential for a global downturn has led to a broad sell-off in commodity prices, including iron ore, copper and oil. Further, the Australian dollar, which is seen as a barometer for risk, has fallen below 60 US cents[6] in local trading – its lowest level since 2009.

Treasurer Jim Chalmers on Monday.
Treasurer Jim Chalmers on Monday. Dean Lewins/AAP

While the direct impact of tariffs on Australia is expected to be modest (with around 6% of our exports going to US), the indirect impact could be substantial. China, Japan and South Korea together take more than 50% of Australia’s exports, and all have been hit with significantly higher tariffs.

Treasurer Jim Chalmers said on Monday that the direct impact on the Australian economy would be “manageable[7]”.

The full effect on Australia will depend on how other countries respond, and whether we can redirect trade to other markets.

The rapid decline in the Australian dollar will help offset some of the negative effects associated with a global downturn and the fall in commodity prices.

We can also expect some interest-rate relief. Economists are now predicting three further interest rate cuts[8] by the Reserve Bank, starting in May. This brings economists into line with financial market forecasts.

Read more: US tariffs will upend global trade. This is how Australia can respond[9]

Hang in there, markets will recover

Watching equity markets tumble so dramatically can be unsettling for any investor. However, it is important to note that equity markets have experienced many downturns over the past 125 years due to wars, pandemics, financial crises and recessions. But these market impacts have generally been temporary.

History suggests that over the long term, equity prices continue to rise, supported by growing economies and rising incomes.

The key thing for investors to remember is to not panic. Now is not the time to decide to switch your superannuation or other investments to cash. This risks missing the next upswing while also crystallising any current losses.

For example, despite the steep market sell-off in March 2020 as the first COVID lockdowns came into effect, the Australian share market had completely recovered those losses by June 2021.

It is good practice for investors to regularly reassess their risk profile to make sure it is right for their current stage of life. This means reducing the allocation to riskier assets as investors get closer to retirement age, while also maintaining a cash buffer to avoid having to sell assets during more turbulent periods such as now.

Super funds are exposed to global risks

The current sell-off has highlighted a potential issue facing the superannuation industry.

So much of our superannuation is now invested in global equity markets, mostly in the US, because Australia’s superannuation savings pool[10] – at more than A$4 trillion – has outgrown the investment opportunities available in Australia.

Another issue facing the superannuation industry is the growth of cyber attacks, with several funds targeted in a recent attack[11]. Given the massive size of the assets held by some funds, it would seem they need to improve their security to be on par with that of the banking system.

References

  1. ^ leading indices (www.reuters.com)
  2. ^ biggest upheaval (www.abc.net.au)
  3. ^ But comments (finance.yahoo.com)
  4. ^ chance of a US recession (www.reuters.com)
  5. ^ Atlanta Federal Reserve Bank (www.atlantafed.org)
  6. ^ fallen below 60 US cents (wise.com)
  7. ^ manageable (www.abc.net.au)
  8. ^ three further interest rate cuts (www.afr.com)
  9. ^ US tariffs will upend global trade. This is how Australia can respond (theconversation.com)
  10. ^ superannuation savings pool (www.abc.net.au)
  11. ^ targeted in a recent attack (theconversation.com)

Read more https://theconversation.com/financial-markets-are-tanking-heres-why-its-best-not-to-panic-253929

Times Magazine

Choosing the Right Legal Aid Lawyer in Sutherland Shire: Key Considerations

Legal aid services play an essential role in ensuring access to justice for all. For people in the Sutherland Shire who may not have the financial means to pay for private legal assistance, legal aid ensures that everyone has access to representa...

Watercolor vs. Oil vs. Digital: Which Medium Fits Your Pet's Personality?

When it comes to immortalizing your pet’s unique personality in art, choosing the right medium is essential. Each artistic medium, whether watercolor, oil, or digital, has distinct qualities that can bring out the spirit of your furry friend in dif...

DIY Is In: How Aussie Parents Are Redefining Birthday Parties

When planning his daughter’s birthday, Rich opted for a DIY approach, inspired by her love for drawing maps and giving clues. Their weekend tradition of hiding treats at home sparked the idea, and with a pirate ship playground already chosen as t...

When Touchscreens Turn Temperamental: What to Do Before You Panic

When your touchscreen starts acting up, ignoring taps, registering phantom touches, or freezing entirely, it can feel like your entire setup is falling apart. Before you rush to replace the device, it’s worth taking a deep breath and exploring what c...

Why Social Media Marketing Matters for Businesses in Australia

Today social media is a big part of daily life. All over Australia people use Facebook, Instagram, TikTok , LinkedIn and Twitter to stay connected, share updates and find new ideas. For businesses this means a great chance to reach new customers and...

Building an AI-First Culture in Your Company

AI isn't just something to think about anymore - it's becoming part of how we live and work, whether we like it or not. At the office, it definitely helps us move faster. But here's the thing: just using tools like ChatGPT or plugging AI into your wo...

The Times Features

From Farms to Festivals: How Regional NSW Is Repurposing Shipping Containers

Regional NSW communities are repurposing containers for farms, tourism, and events Farmers and small businesses use them as cost-effective, flexible infrastructure Festivals ...

What a Mobile Speech Pathologist Really Does for Late Talkers

As a parent, it’s natural to keep a close eye on your child’s development. When your toddler isn’t using as many words as their peers, the internet can feel like a rabbit hole ...

Benefits of Tree Pruning for a Thriving Australian Garden

Tree pruning is an essential aspect of garden maintenance that often doesn't get the attention it deserves. It's a practice that involves the selective removal of certain parts...

What is psychosocial therapy? And why is the government thinking about adding it to Medicare for kids?

The government is considering new, bulk-billed health checks for three-year-olds, to pick up developmental concerns and refer kids that might need additional support. The de...

Detect Hidden Water Leaks Fast: Don’t Ignore Hot Water System Leaks

Detecting water leaks early is crucial for preventing extensive damage to your home. Among the various parts of a home’s plumbing system, hot water systems are particularly suscept...

Why do hamstring injuries happen so often and how can they be prevented?

In a recent clash against the Melbourne Storm, the Brisbane Broncos endured a nightmare rarely seen in professional sport — three players tore their hamstrings[1] in a single g...