The Dow Jones Index (the mostly often quoted US share index, even though it only represents 30 companies) suffered its sharpest points fall in history yesterday and this rout was immediately replicated in Asian markets overnight and in Europe this morning. The FTSE 100 opened down 3.5% but has since recovered some ground, it’s down 1.87% as I type.
America sneezes and the rest of the world does indeed catch a cold.
It is important to put these recent falls (markets have been trading down for a week or so now) into proper perspective. The falls actually follow some very good years for investors. In 2017 the Dow was up 25%, helped by a resurgent economy and strong corporate profits and European markets have also seen solid growth without a great deal of volatility; so maybe some form of correction is overdue.
What is interesting is the cause or rather the trigger for this correction. The global sell-off began last week after a particularly solid US jobs report (good news, right?) fuelled expectations that inflation will rise, leading the Federal Reserve to raise interest rates faster than expected. This makes corporate borrowing more expensive, which is of course, not good for companies (oh, so it’s bad news!).
The following is taken from the BBC website:
‘Jane Sydenham, investment director at the stockbrokers Rathbones, told the BBC the falls did not appear to herald a serious change of sentiment: "It is always a bit too early to tell, but I think these recent market falls are in the nature of a correction.
"What we have to remember is stock markets have had a very smooth ride upwards and we've not had a fall of more than 3% for 15 months. There's been a real lack of volatility, which is very unusual."
She added that bear markets tend to happen ahead of a recession and at the moment growth forecasts were being upgraded.
Erin Gibbs, portfolio manager for S&P Global Market Intelligence, said: "This isn't a collapse of the economy.
"This is concern that the economy is actually doing much better than expected and so we need to re-evaluate."
One country whose immediate economic outlook remains stagnant is Japan. The authorities there said there was little chance of interest rates being increased.
The Bank of Japan's governor, Haruhiko Kuroda, ruled out the possibility of raising interest rates in the near future. He said it was "inappropriate" to do so with inflation still about half its 2% target.
But markets in Asia typically follow the lead from the US.’
That last point is very interesting; there is no prospect of Japan increasing interest rates as is feared in the US and yet Asian stock markets still tumble. Sometimes markets appear to need an excuse just to reassess valuations.
These falls might present an excellent buying opportunity for long-term investors but there could be some more downside before sentiment improves.
If you have any concerns about your own investments, please do not hesitate to call me.
With kind regards,
Graham Ponting CFP Chartered MCSI