If you kept a keen eye on the global financial markets throughout the first month of the year, we would excuse you if you were quite alarmed. The S&P/ASX 200 is now off 8%, and MSCI All Country World is off 9%.

This article examines why and presents some indicators on where we are headed too next.

COVID-19 Reaction Caused Valuation Expansion

Two years ago, when the world was beginning to learn about the Coronavirus, borders were shut, vacations canceled, and markets sold off 30 percent before bouncing back to the most aggressive bull market we have ever witnessed.

According to Sydney financial planners, this rise was attributed to fast and extensive stimulus from the central banks, which dished out money. Also, these lending institutions cut interest rates close to zero; hence, rendering fixed interest unappealing, thus driving cash into higher-risk possessions. Central banks have also gone the extra mile of purchasing bonds the entire time, and this provides a threshold beneath the price of bonds and liquidity.

Currently Being Undone

The prevailing sell-off is attributed to the whole exercise of undoing the above measures. The major lending institutions are discussing (or have initiated) decreasing or stopping the bond purchasing scheme. Additionally, many of them are pondering increasing interest rates shortly due to rising inflation. And the stimulus is gradually dwindling.

The Market Price to Earnings Multiple

According to Sydney Financial Planners, the Australian market has been trading above its 20-year average price to earnings from 2014. The price to earnings is the cumulative of all market caps in the ASX200 divided by the cumulative earnings. However, the pandemic crash sent spiraling beneath the mean before the factors stated above, and the projection of a swift financial recovery made it skyrocket. The price to earnings has been reducing through the last year because of rising earnings. Nonetheless, it has continued to fall through since the beginning of the year; thus, translating to lower prices.

Ergo, If Valuations Are Getting More Appealing, Is Time Right To Purchase Them?

The Sydney Financial Planners give a conclusive perhaps. Price to earnings have been growing, and since February 2020, the market has felt overvalued. In addition, the valuations have come back to the market level it was before the pandemic crash. And there is a correlation between valuations and interest rates.

Take Away

The current sell-off has presented some appealing purchasing chances, particularly within the higher price to earnings. However, price-to-earnings multiples remain high compared to the twenty years. But Sydney Financial Planners believe that 3 percent interest rates are likely to be years away. Even with the rising inflation, 3 percent interest rates will negatively impact the fiscal budget. And this will not be good for the lending institutions.