Will this ASX 200 correction turn into a major bear market?
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Before a slight rebound on Thursday, the S & P / ASX 200 Index (ASX: XJO) had fallen 4.7% from its peak on August 13.
So, will this correction turn into a bear market, or will it just be a misstep before stocks skyrocket?
According to AMP Capital’s chief economist, Dr Shane Oliver, he is too early to declare the withdrawal complete.
“Some of the concerns about the fiscal policy and policy of the United States, China, global supply constraints and central banks are likely to continue and could see the correction continue,” he wrote on a AMP SA (ASX: AMP).
A lot of worries for the equity markets at the moment
The ASX 200 and foreign markets both face multiple sources of anxiety.
The U.S. government reportedly ran out of money this week, but a last-minute deal delayed that fate until at least December.
“But that just means the problem will return in a few months – with the need to avoid a government shutdown where funding has also been extended until December,” Oliver said.
“Republicans still have no plans to vote for this as it will be seen as a Democrat spending endorsement.”
The Democrats’ social spending program and the re-appointment of US Federal Reserve Chairman Jerome Powell are also cause for concern.
On the other side of the world, real estate developer Evergrande had a stay of execution but clouds still hang over his fate.
“Evergrande has yet to be resolved and other developers are having issues,” Oliver said.
“The more general slowdown in Chinese growth reflects the earlier removal of stimulus and coronavirus restrictions in August, which have since been relaxed.”
Oliver believed that Beijing would not allow a major downturn in the economy, as it would risk causing “social unrest”.
To add to these concerns, gas prices have increased six-fold this year in Europe and there are power outages in China.
But the biggest problem is supply and inflation
Most importantly, Oliver believes that there is an issue that could have a much more direct and lasting impact on ASX 200 stocks.
“Supply constraints and inflation – this is the biggest problem because a permanent increase in significantly higher inflation will mean lower price / earnings multiples / higher required returns on assets.”
He added that while a huge increase in the supply of money around the world poses an inflation risk, the current dilemma is more attributable to the temporary distortions caused by COVID-19.
“In the pre-COVID world, the global supply system was a very finely tuned and very efficient machine.
“The coronavirus triggered it with outbreaks (people cannot go to work) and their response (eg improved unemployment benefits encouraging people not to work) causing disruption in production and demand based on on the goods of the services which are manifested all today. problems.”
The prospect of inflation is causing central banks around the world to become more hawkish. Last week, New Zealand already raised its official spot rate.
So is this the start of a bear market for the ASX 200?
Oliver predicts that gray clouds will remain in the short term.
“The risk is that the correction will continue to run,” he said.
But as to whether the correction will turn into a significant bear market, Oliver said a recession was the historic catalyst for such a slowdown.
The good news is that he doesn’t see the long list of worries as serious enough to trigger a US, global or Australian recession.
“At the end of the day, we see the problems largely resolved in a way that does not seriously threaten global growth,” Oliver said.
“So with global monetary policy likely to remain relatively accommodative for some time, we continue to see the broader trend in global and Australian equities to rise once the correction is over.”