It was back to the doghouse for Australian shares on Wednesday.
Just when you thought share market volatility had subsided, the S&P/ASX 200 (ASX: XJO) went and fell more than 100 points.
It ended the day 2.1% lower, erasing much of the gains achieved over the last few weeks.
All good things must come to an end, as they say…
In reality though, the debacle wasn't caused by anything new.
That's often the case – confidence rises and, just when everything seems to be getting back on track, a corner of the market gets cold feet again.
And often, those dips in confidence can represent opportunities for long-term investors to buy down-and-out shares.
But first, house prices were again the topic of the day, receiving great coverage from journalists at The Australian Financial Review and the like…
A property bubble has been speculated for yonks, particularly given the soaring house prices in Sydney and, to a lesser extent, Melbourne, in recent years.
It's a problem that the regulators are well and truly aware of…
Throughout 2015, the Reserve Bank of Australia was reluctant to reduce interest rates below 2% for fear of pushing house prices even higher.
Meanwhile, the banking regulator APRA enforced tougher capital restrictions on the banks, forcing them to hold more cash against any mortgage loans written.
It'll act as a drag on their earnings, but it could certainly protect taxpayers from a potential bailout if cracks do start appearing in the sector…
Now, I'm not suggesting that will happen.
Of course, there is that risk, but there are reasons to believe the fears have been overblown as well.
Consider this from The Sydney Morning Herald, which quoted Mortgage Choice Limited (ASX: MOC) CEO John Flavell:
"For the first time in a long time, supply is coming to meet demand. Sure you can point to pockets where supply and demand gets it wrong but what drives demand is population growth, employment and the costs and availability of credit."
The population is growing; employment has remained mostly steady; and local interest rates are the most accommodating in history at just 2%.
Check, Check, Check.
Meanwhile, online property platform Domain Group said calls for a housing crash were "outrageous".
It quoted AMP Capital chief economist, Dr Shane Oliver, as saying (emphasis added):
"Unless we have a very severe recession or interest rates go sky high causing people to default, it's not going to happen."
Given the headwinds facing the economy, it's difficult to see the RBA hiking interest rates anytime soon, so that's a bonus…
It's also worth remembering that bad debt charges are still sitting around record lows, so mortgage holders aren't having a problem paying off their debts just yet.
One last word from Dr Oliver:
"The logic doesn't support any prospect of the type of house price drops being forecast by the doomsayers."
Enough said.
Nevertheless, investors decided it was right to reduce their exposure to the banks which dragged on the market in a big way.
All four of the major lenders fell at least 2%, but National Australia Bank Ltd.(ASX: NAB) and Westpac Banking Corp (ASX: WBC) both ended the session nearly 4% lower.
Ouch!
BHP in hot water (again)…
But the banks weren't the only stocks packing a punch – not by a long shot.
Indeed, it seems that investors came to realise that the worst isn't over for BHP Billiton Limited (ASX: BHP) after all.
The Big Australian's shares climbed as much as 27% in recent weeks, but that came to an abrupt halt on Wednesday when the shares crashed 8.2%.
According to The SMH, it was the stock's worst single-day drop since December 2008.
The miner reported its first-half earnings results on Tuesday.
Not only did it report a US$5.67 billion loss and an underlying result that came in well below expectations, it also scrapped its progressive dividend policy.
Such a move was expected, but few would have predicted the magnitude to which the dividend would be cut.
Shareholders will receive a payout of just US 16 cents for the period, down almost 75% compared to the same period last year.
Most analysts thought it'd be cut by around half…
Meanwhile, the progressive dividend policy has finally been replaced with a new, more conservative dividend policy — one based on underlying earnings results rather than a promise to increase distributions no matter what.
It would have ruffled some feathers, but all in all, it was the right decision.
But that wasn't necessarily why the stock took a belting on Wednesday.
It seems investors are more concerned about the outlook provided by management.
CEO Andrew Mackenzie said "we now believe the period of weaker prices and higher volatility will be prolonged."
I agree. Commodity prices have rebounded over the last few weeks, but there is still a huge oversupply of both iron ore and oil.
Unless demand can lift to meet supply – or if supply falls to a more appropriate level – commodity prices could certainly have darker days ahead of them.
That's bad news for those who were fooled (lower case 'f') by the BHP rally recently.
The market is always worried about something…
I'm not buying the banks or the miners just yet.
Although their share prices are falling, the headwinds facing both industries are clear.
Whether or not they come to fruition is another thing, but I just don't think the risk vs. reward trade-off is attractive enough yet – not at these prices, at least.
While investors are piling out of these shares however, they're also selling a number of other high-quality businesses that aren't directly exposed to those risks, and that's your opportunity to pounce.
The fact is, the market is always worried about something.
In 2011, the fear surrounded potential hyperinflation as a result of the activity of central banks around the world.
More recently, fears of war between Russia and the Ukraine, or a collapse of Greece's economy and the potential contagion effect have also plagued the market.
Those scenarios didn't play out, and these ones aren't guaranteed to, either.
Your latest ASX stock pick
Earlier in the week, my boss posed the question: What's worse than a bear market?
His answer? Missing out on a bull market.
By accepting the status quo, you could sell your shares into the panic today and get out of the market altogether.
But you'll probably regret it at a later date.
Because although I don't know when this bout of volatility will end, I know it will end, and it will likely be those investors who held on for the ride that are rewarded.
Better yet, with the ASX 200 still hovering firmly in correction territory, those who buy will probably be the biggest winners.
