Don't panic about the volatile Dow Jones market. That's the message from US-based Ovum research fellow, Carter Lusher.
Let's face it: the Dow Jones nay have closed up more than 400 points overnight, but there's little doubt Monday’s plunge showed the US stock market is in for a rough ride in the near future.
And that bear market not only has implications for the entire US economy, but also the potential to strongly affect the business world in Australia, more importantly, its IT sector. How badly is the question. And the answer to that comes down to what is really happening in the US, how badly it is hit and the probable future.
Even though Monday’s drop was the sixth biggest in the Dow Jones’s history, Lusher, said volatility in the stock market wasn't anything new.
“There were a number of factors that contributed to it, some of which were due to domestic US politics, the ongoing uncertainty with the European debt problem, automated trading based on algorithms, and the emotions of stock traders,” he said.
Lusher points out that the underlying business conditions are the same today as they were last week before this latest set of volatile trading sessions began.
“Remember up until the soap opera of the debt ceiling negotiations, the major stock indices such as Dow Jones and S&P were at 52-week highs,” he said
When looking at what effect drops such as the one on Monday would have on business confidence, Lusher expects it to be negligible.
“What affects the confidence of companies, from small business to large enterprise, is the demand for their products by customers, whether other businesses or consumers,” he said.
“The downside for business of this recent stock volatility is that consumers might pull back from spending due to fear.”
To illustrate his point, Lusher highlights the last few quarters that have seen record aggregate profits being reported by public companies, and big profits help companies shrug off temporary stock market volatility, especially when the volatility is due to politics and not macroeconomic conditions.
Investors concerned about the information technology and telecommunications (ICT) industries being affected by the recent stock market volatility will be happy to hear that Lusher does not expect the outlook to be particularly worrisome.
“Companies are investing in ICT for the long run, to improve productivity, reduce costs, and in certain cases create products the markets demand,” Lusher said.
“Consumers seem quite interested in buying the latest gadgets, especially if the gadget has an Apple or Android logo.”
While Lusher is upbeat about businesses weathering the volatile Dow Jones, he doesn't think the stock market is out of the woods.
“Unfortunately, until the US Government and the European Union eliminate the drama we will still see volatility in the stock market,” Lusher said.
“However, what is the most important is the strength of profits, capital investment in ICT, and consumer spending.”