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Tumble needs strong stomach

The downturn on the sharemarket seems to have commenced with the anti-trust suit lodged and successfully prosecuted against Microsoft.

As a result, traders in the technology end of the market decided to sell down their stock holdings in other related stocks.

On Friday 14 April, the US inflation figures were released – with levels considerably higher than the analysts on Wall Street had expected.

A resultant second bout of selling in the technology sector then spread to the broader market.

On the day’s trade, Wall Street was down 618 points or approximately 5.5 per cent.

On the other hand, NASDAQ, the measure of the technology sector, was down 10 per cent on the day’s trade to add to the earlier decline of around 17 per cent.

The question uppermost in the minds of most traders is whether the fall is the start of a sustained bear market or confined to the technology sector.

In Australia, the fundamental economic factors have not changed.

Australia still has a strong growth rate and relatively low interest rates.

In addition, there are $12 billion worth of tax cuts due in July and the Sydney Olympic Games to help fuel economic growth.

These factors alone will ensure that any fallout in the Australian sharemarket is unlikely to flow through to the ‘real economy’.

The other factor that will assist the local market is that Australia has a relatively thin technology sector.

Unlike the US stockmarket that is now dominated by the technology sector, the Australian market is still concentrated in ‘old economy’ stocks.

Australian use of margin lending has also been somewhat restrained.

These are important determinants of the market reaction that is to be expected.

Overall, while there will be some carnage and a number of small investors will panic and opt out of their stocks, this could be a very good time to be reinvesting cash holdings in ‘old economy’ stocks that have had a reasonable downgrading already.

A rotation to these stocks will benefit the relevant component of the All Ordinaries Index.

Stocks such as Coles Myer, Wool-worths, SouthCorp and Wesfarmers which had been sold down are likely to be back very much in favour again.

Even so, as is customary, it will take a great deal of intestinal fortitude to remain calm through the volatility of the next six months.

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