Wall St rebounds after Monday dive


Wall Street has rebounded following Monday's sharp sell-off on world markets.

But market analysts say the volatility looks set to continue. So if you are in KiwiSaver you should ignore the noise and focus on your long term goals.

Wall Street's three major indexes all rose by more than 1 percent this morning. That followed a global selloff in which New Zealand's S&P/NZX50 Index fell by 2.5 percent yesterday.

New Zealand fell by more in percentage terms than the Australian and Japanese markets. The fall of 2.5 percent was also larger than the fall on June 24 after Britain voted to leave the European Union.

Investors were reacting to a bad day on Wall Street on Friday, prompted by talk that the US Federal Reserve might hike interest rates as soon as next week.

Some US Federal Reserve officials had made comments suggesting they thought the American economy had improved enough for the Fed to go ahead and lift rates.

So why would that spook the markets?

Isn't an improving economy a good thing? Yes. But that is not what many short term traders and investment funds are focused on.

Higher interest rates make investments like bonds and term deposits look more attractive to investors who have put their money into the share market. Companies that pay high dividends tend to be particularly affected. New Zealand's market has a number of companies that pay high dividends.

A lift in interest rates also raises borrowing costs for many companies that are listed on world share markets.

The New Zealand market has had a strong run and some investors have been concerned for some time that many stocks are fully priced. That has left many people wondering if it is time to take some profits.

If some investors start pulling money out of the share market it inevitably prompts others to do the same.

Wall Street's major indexes have all risen strongly today.

The Dow Jones Industrial Average rose by 1.32 percent, or 239 points.

The broader S&P500 added 1.44 percent and the tech-heavy NASDAQ added 1.68 percent.

The rally was helped by comments midway through the trading day from Federal Reserve Governor Lael Brainard, who said that although the US economy is improving, it would be wise for the Fed to hold steady on rates.

She is one of the members of the committee that will vote next week on whether the Fed should lift its key overnight lending rate from 0.5 percent.

Analysts say the markets will remain volatile going into next week's Fed meeting, with investors looking for clues about what the Fed might do.

If the Fed hikes there could well be a selloff. But will stocks then quickly regain the lost ground like they did in the wake of the Brexit selloff?

If the Fed does not move, will there still be a selloff as investors bet on a rate hike in December?

What does all this mean to you if you are in a KiwiSaver fund? The advice remains the same as it was during the selloff in the wake of the Brexit vote in June.

The Commission for Financial Capability says KiwiSaver is a long-term investment, so you should try to not let short-term volatility put you off. Nor should you stop contributing or suddenly switch providers.

The Commission says if you have concerns you should talk to your provider to make sure you are in the right fund for your age and risk appetite.

When markets fall it is an opportunity for long term investors to take advantage of what is known as dollar cost averaging.

Here is how the Commission's Group Manager for Investor Education, David Boyle, explains it.

Imagine you are at the supermarket and baked beans are selling for $2 a can. You will probably buy enough to last a fortnight or a month.

But the next time you go you find they are on special, with two cans for $2. Their "value" has gone down, but their contents are the same. What would you do? You'd probably stock up and buy some extra cans.

Mr Boyle says: "When markets go down they are the same companies, the same shares, but the value has just gone down."

"Maybe this is a good time to put a little more in or at least realise that the values of these companies and assets go up and down every day and the more important thing is to make sure you don't realise that loss by selling low and then buying high again when the values go back up again."

He says the key is to stick with your long term plan and try to manage the bumps along the way as best you can.