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When share markets pull back, every conversation tends to surface the same instinct: list the worries. The trouble with the worry list is that, written down all at once, it can feel overwhelming. The same items, taken one at a time and viewed with a bit of history, are usually more manageable.
A useful piece of work on this came from Dr Shane Oliver in 2021, in his role as Head of Investment Strategy and Economics and Chief Economist at AMP. He walked through the share market worry list with a calm, structured eye. The specific names on the list change between cycles. The framework for thinking about them does not.
This piece uses Oliver’s framework to lay out a way of thinking about market worries that is meant to take the edge off, not paper over them.
Oliver’s key point about corrections versus bear markets
Before working through the list, the most important sentence in Oliver’s piece is the one about how share market downturns usually end. Historically the main driver of whether we see a correction or a mild bear market, as opposed to a major bear market, is whether we see a recession.
That is the anchor. Pullbacks and corrections happen often. Major bear markets are typically tied to a real economic contraction. So the most useful question when the worry list lengthens is not ‘how bad does the headline feel?’, but ‘how close are we to a recession in the underlying economy?’
The seven recurring worries (plus one)
Oliver’s worry list at the time included the following items. Each one shows up in some form in most cycles.
1. US debt-ceiling brinkmanship
When the US Government approaches its debt limit, headlines escalate quickly. In Oliver’s framing, the political theatre is real, but ultimately neither party allows a true default to happen. Debt-ceiling fights have, in past cycles, contributed to share market pullbacks (around 19% in 2011 and roughly 4.5% in 2013), but the eventual outcome has been resolution, not default.
2. US fiscal policy and taxes
Big spending packages and the tax debates that fund them can rattle markets at the margin, especially when tax hikes touch profits, capital gains and dividends. Oliver flagged that gridlock or significant tax hikes can knock a few per cent of US earnings, which is a short-term negative for shares but rarely much beyond that.
3. Fed Chair renomination
Markets tend to prefer continuity at the Federal Reserve. Oliver expected the choice would either be the incumbent or someone more dovish, which suggested this would not ultimately be a big issue for markets, even when the headlines were loud.
4. Evergrande and the Chinese slowdown
China Evergrande was a serious story without being a structural one. Oliver pointed out that while the company might account for a meaningful share of China’s US-dollar bonds, it was only around 0.1% of Chinese bank debt. A Lehman-style moment looked unlikely. The broader Chinese slowdown was the bigger picture, and one Beijing had policy tools to address.
5. European and Chinese energy crises
Surges in energy prices feed straight into supply bottlenecks and inflation, and they take time to resolve. Oliver noted that some relief was already visible (additional gas supply, easing of restrictions), but that the path back to normal was likely to be uneven.
6. Supply constraints and inflation
This was the biggest single worry on Oliver’s list. A permanent shift to significantly higher inflation would mean lower price-to-earnings multiples and higher required yields across most asset classes. The view at the time was that much of what was being seen was pandemic-era distortion to global supply and demand, rather than a deep structural inflation story.
7. Central banks becoming more hawkish
Central banks moving towards the exits from ultra-easy money is real, but the qualifier matters. As Oliver wrote, ‘tapering’ is not tightening. The Fed and the RBA reducing the pace of bond buying still meant cash being pumped into the economy, just at a slower rate.
Plus, Covid-19 risks
On top of the seven, Covid-19 still posed risks, even as vaccines and treatment options improved. Oliver’s framing was cautiously optimistic: progress was real, but the path out was longer and messier than expected.
How to use this framework today
The specific worry list will look different today to what Oliver wrote about back in 2021, but the discipline is the same. Three steps.
- Write the worries down. Vague anxiety always feels worse than a clear list.
- For each worry, separate the real economic impact from the headline impact. Most worries hurt sentiment more than earnings.
- Cross-check against Oliver’s anchor: does this worry plausibly drive a US, global or Australian recession? If not, the path is likely a correction inside an ongoing trend, not a major bear market.
What to do next
Two questions to take into your next strategy conversation.
- If the worry list doubled in length tomorrow, what in your plan would actually need to change?
- Where does your portfolio rely on bonds, cash or other defensive assets to absorb a correction without forcing you to sell growth assets?
Our investment committee constantly assesses where the worry list is shaping risk and where it is creating opportunity. If you would like to talk through how to apply Oliver’s framework to your own plan, please reach out.
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Frequently asked questions
Who is Dr Shane Oliver?
Dr Shane Oliver wrote this framework in his role as Head of Investment Strategy and Economics and Chief Economist at AMP. His broader work has helped many Australian investors think through cycles in a structured way.
What is the most important point in Oliver’s worry list?
Historically, the main driver of whether share markets see a correction or a mild bear market, as opposed to a major bear market, is whether we see a recession. The recession question is the anchor.
Is ‘tapering’ the same as tightening?
No. Oliver was explicit that ‘tapering’ is not tightening. When the Federal Reserve or RBA slow their bond buying, they are still pumping cash into the economy, just at a slower rate.
How should an Australian investor act on a worry list?
Write the list down. Separate real economic impact from headline impact. Cross-check whether the worries plausibly drive a recession. If they do not, the path is likely a correction inside an ongoing trend rather than a major bear market.
Does the US debt ceiling cause major bear markets?
Debt-ceiling brinkmanship has produced significant short-term pullbacks (a 19% fall in 2011 and around 4.5% in 2013), but in Oliver’s view, neither party ultimately allows the US to default. The volatility is real, the default outcome historically is not.
Ready to talk?
If you would like a calm, no-pressure conversation about how to think about the current worry list, we would be glad to set one up.
Please feel free to get in touch on 1300 925 081 or send an email to [email protected] if you’d like to book in a chat on the above or on other matters.
Disclaimer
This article contains general information only and has been prepared without considering your objectives, financial situation or needs. It is not personal financial advice, taxation advice or legal advice and should not be relied upon when making financial decisions. Before acting on any information, consider its appropriateness to your circumstances and seek professional advice where appropriate.
