The ASX is falling - will interest rates rise?

With the Australian stock market falling more than the last few weeks, there has been a lot of talk around consumer confidence and inflation as the possible causes.

The RBA is set to meet for the first time next Tuesday, and the focus is on whether they will raise interest rates and how this will affect the stock market.

According to the RBA, inflation is currently sitting at 3.5%. To put this into perspective, at the start of this century inflation was 1.8% and has been as high as 5% in September 2008 and the lowest in June 2020 when it fell to -0.3%.

According to Trading Economics, the Australian inflation rate has averaged 4.86% from 1951 to 2021, yet we are now at the highest level of inflation in the last 13 years since 2008. Consequently, many are talking about raising interest rates to slow the economy and curb inflation.

Right now, given the current COVID situation, I do not think there is a solid argument for raising interest rates although I do believe they will rise this year. That said, I don't believe the rise will be anything significant, as the RBA knows that the current factors driving up inflation are only temporary.

Regardless of your views on whether interest rates will rise next week, the fact is that the market is falling. So, understanding why is of least importance; what you need to focus on is whether to hold your position in the market, reduce it or exit altogether.

In my opinion, investors are too focused on what the index is or will do rather than focussing on their investments. Right now, I am not focusing my attention on the market or interest rates but instead on some of the top 50 stocks in our market, as I believe they will present some great buying opportunities in the next few weeks.

The best and worst performing sectors this week

Once again, all of the sectors in the Australian stock market are down with the best performing including Utilities down around 2% followed by Energy down more than 2% and Consumer Staples down more than 3%. The worst performing sectors include Information Technology down more than 9% followed by Healthcare and Consumer Discretionary, which are both down more than 5%.

The best performers in the S&P/ASX top 100 stocks include AusNet Services and a2 Milk, which are all up more than 2% followed by Rio which is just in the green. The worst performing stocks include Evolution Mining, Mineral Resources and Wisetech Global, as they are all down more than 15% followed by Northern Star and Lynas, which are both down around 13%.

What's next for the Australian share market

Since achieving a new all-time high of 7926 points on January 5, the All Ordinaries Index has fallen more than 11% to a low on Thursday of 7031, which is very close to my target level. As I have mentioned previously, given that our market hasn't experienced a major fall since the COVID crash in March 2020, it was possible that it would fall below 7000 points and this is looking very likely.

I believe we have seen the majority of the fall in price and while the down move may last another few weeks, the All Ordinaries Index is unlikely to fall much below 6800 points. Many investors are worried about the market right now, so I want to be clear that I do not believe it will crash this year. That said, as always, I urge investors to protect their capital in case it falls further. Medium term, I believe once we confirm the low, our market will have a very nice run up this year and continue in a longer term uptrend until the middle of this decade.

Correction: An earlier version of this article incorrectly named Oil Search as a top performer on the ASX in January. Oil Search was delisted in 2021 as part of a merger.

Get stories like this in our newsletters.