Everything you need to know about the Australian share market today in less than three minutes… from The Capital Club.
What’s the big deal?
The ASX 200 index is trading at close to a four month low on Monday, with mining shares and bank shares dragging the benchmark index down.
The fall in the Australian share market comes after Wall Street sank on Friday amid fears US interest rates will need to rise quicker and further than previously expected.
The yield on the US 10-year bond rose to 3.23 per cent, its highest since May 2011.
The share market gains since the depths of the GFC have largely come on the back of central banks around the world slashing interest rates to near zero in order to stimulate economic growth.
And guess what? It has worked, especially in the US, where unemployment has fallen to its lowest level since 1969.
What does this mean?
Higher yields for risk-free assets like US bonds makes them look comparatively more attractive than shares, which is why the stock market is falling.
What would you prefer to take?
A risk-free 3.23 per cent in US bonds or Commonwealth Bank of Australia (ASX:CBA) shares trading on a fully franked dividend yield of 6.2 per cent, or almost 9 per cent when grossed up for franking credits?
CBA shares look like a no-brainer, but they come with the very real chance of capital loss –CBA shares have fallen 9 per cent over the past 12 months, and like all bank shares, face headwinds.
Just today, Australia and New Zealand Banking Group (ASX:ANZ) shares have slumped 2.45 per cent after flagging an $824 million hit to its profits, in large part due to revelations at the banking royal commission.
What should you do?
Although our share markets often move in unison, the Australian and US economies are much further apart.
The disparity manifests itself more clearly in interest rates.
While the US Federal Reserve is increasing interest rates, the RBA is much more likely to stand pat, holding the cash rate at just 1.5 per cent for the rest of this year, and potentially into 2020.
By comparison to the RBA cash rate, ASX-quoted companies trading on dividend yields of around 4 to 5 per cent look very attractive, more so if they pay fully franked dividends.
Two ASX 200 dividend shares that fit the bill and might be worth a look are Tabcorp (ASX:TAH) and Mineral Resources (ASX:MIN).
Although I’ve long been cautious about bank shares, I wouldn’t be selling out of any shares on a down day like today.
On the contrary, trading on a grossed up dividend yield of 8.9 per cent, CBA shares look decent value.
Some time this week, I wouldn’t be surprised if Wall Street has a change of heart, putting aside inflationary fears and focusing on how the booming US economy will drive higher corporate profits.
As a stock market investor, the worst thing you can do is trade in and out of the market on the emotions of fear and greed.
Stay in the market come what may, add to your investments over time, and commit to being an investor for life. Sit back and let the miracle of compound returns do the rest.