2018 will perhaps be remembered as one with big swings in the stock market.
It was not uncommon to see stock price swings of more than 10% in a single day — even Singapore’s largest company DBS Group Holdings Ltd (SGX: D05) faced huge price swings this year.
As 2018 comes to a close, certain factors could cause the market volatility to continue. Here are three key risks that investors should take note of.
The China-US trade wars have been one of the key reasons for market volatility this year. It all started when President Trump issued tariffs on US$50 billion of China imports. China was quick to retaliate, issuing its own set of tariffs on US-imported goods.
Before long, the trade war spiralled to include a whole range of goods, of around US$200 billion worth of Chinese imports, with China retaliating in kind.
Trade restrictions and tariffs can have an impact on corporate profitability. While the escalation of the trade war has paused for now with a 90-day trade truce agreed earlier this month, it is yet to be seen what both countries will do in 2019.
Any news regarding the trade war will undoubtedly lead to more swings in the stock market.
Just last Wednesday, on 19 December, the Federal Reserve, the central bank in the US raised its benchmark interest rates in the country for the fourth time this year. The rates were increased by 0.25 percentage points to 2.5%.
Interest rates affect stocks and companies in many ways. First, interest rates impact companies that borrow money. Higher interest rates lead to higher borrowing costs, which will, in turn, lead to lower profitability or deter companies from taking on more debt for expansion.
Second, interest rates affect stock valuations because in higher interest rate situations, the returns on bonds increase and investors may shift their money away from stocks and to interest-bearing instruments.
The Fed is expected to raise rates at least two more times next year, and this could lead to more market volatility.
Finally, higher operational costs facing US companies could also affect their profitability next year.
In a report by HSBC, analysts noted that rising costs such as wage growth, trade tariffs and financing costs could go up next year. Notably, with unemployment rates at historically low levels, wage growth could rise faster than expected and could cause narrowing of profit margins.
The Foolish bottom line
The above factors could have a very real impact on the profitability and perception of markets in 2019. As such, these factors could lead to more market volatility and swings in share prices.
Nevertheless, long-term investors should not fret over near-term price swings. Market volatility is part and parcel of investing and should not impact long-term returns. Investors who are in it for the long run should continue to stay the course.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares of DBS Group Holdings Ltd.