It has been another difficult day for the S&P/ASX 200 Index (ASX: XJO) following a wild night on Wall Street.
At one stage today, the benchmark index was down as much as 2.9% to 6,758.2 points. This is despite the ASX 200 being up 1.1% in earlier trade.
This means the index has fallen into correction territory following a decline of greater than 10% from recent highs.
What's happening?
The ASX 200 has come under pressure again today amid concerns about the potential for rates to rise sooner than expected. This follows comments out of the US Federal Reserve overnight which indicated that its first hike could be coming as soon as March.
There are a number of reasons why this is spooking the market. One of those is that interest rates play a key role in valuations. When the risk-free rate is low, valuations are high, and vice versa when the risk-free rate is high.
This is because if investors can get a return from a risk-free asset, riskier assets will need to generate stronger returns to satisfy investors.
As an example, while an investor may have been willing to pay 20x earnings for Coles Group Ltd (ASX: COL) shares with interest rates at close to zero, they may only be willing to pay 18x earnings when interest rates at 2%, ceteris paribus. This is because they may believe the potential return will be sufficient enough at 18x earnings to warrant not just leaving their funds in a risk-free savings account or term deposit.
The good news for investors is that the market almost always overreacts to situations like this, with shares being oversold and bargains being created across the market. In fact, The Motley Fool Australia's Chief Investment Officer, Scott Phillips, is continuing to buy during the volatility, noting that the Australian share market has never yet failed to recover to a new high following previous market crashes.
Scott's sage words
In response to today's declines, Scott said:
"We've been here before.
Over and over. It's never nice. It's rarely fun.
But it happens.
We were here during the 2020 COVID crash. During the GFC. During the dot.com crash. During the Asian Financial Crisis. The 87 crash.
But remember: the ASX has never yet failed to regain, and then surpass, its previous highs.
Is that a guarantee? No. We can't morally or legally give you one.
But I have a high degree of confidence that history will be a good guide.
Because our businesses find ways to meet needs, deliver on wants, and keep growing.
Democratic capitalism has a bright future, despite the volatility.
I'm fully invested. I'm not selling. I'll continue to buy.
Eyes on the horizon. Keep a long term perspective Fools!"
