Earlier this week stock markets around the world suffered sharp falls. In addition, the virtual currency Bitcoin fell 11% in one day. So are we heading for global turmoil? Should we sell everything and head for the hills? Or was it simply normal stock market fluctuations, and nothing to worry about?
Almost exactly a month ago the BBC published an article in its business pages. Stock markets hit record highs – here are three reasons why.
Stock markets did indeed hit record highs in January. Having finished 2017 at 7,688 the FTSE-100 index of leading shares reached an all-time high of 7,779 on January 12th. And the joy wasn’t confined to the UK: stock markets around the world were rising, as they followed a very good 2017 with a stellar start to the New Year. The Hong Kong market rose 10% in the month: Brazil did even better, rising by 11%. India was up, China was up and America’s Dow Jones index broke through the 25,000 barrier for the first time, as it rose 6% to finish January at 26,149.
Why did global stock markets do so well in January?
First and foremost there was good news from China – the driver of so much of the world’s economy. Growth for 2017 was reported to be 6.9%, well ahead of the Government’s official target of 6.5%. In addition, the World Bank issued a bullish forecast as it looked ahead to 2018. Reporting that global economic growth had been stronger than expected in 2017, the Bank forecast growth of 3.1% for the coming year. The Bank’s president, Jim Yong Kim said, “The broad-based recovery in global growth is encouraging.”
Add low-interest rates, easy monetary policy around the world and Donald Trump’s determination to make the American economy great again, and it was no wonder that stock markets were doing well.
In fact, only one major stock market fell during January – the UK. Having reached that all-time high the FTSE gradually fell away and finished January down 2% at 7,534 thanks to the collapse of Carillion and continuing worries about Brexit.
Or maybe the UK simply had a glimpse of the future…
Four weeks on and Tuesday morning’s BBC headlines made very different reading:
Wall Street suffers sharpest drop since June 2016
Asia stocks join global stock plunge
City AM joined in with FTSE follows Asia and Wall Street in third day of global equity rout, as the UK’s leading index lost 3.5% of its value as soon as trading started on Tuesday.
It is easy to think, ‘So what? The hedge fund gazillionaires who made so much out of betting against Carillion have just lost some of it.’ But, of course, falls in the stock market affect most of us – the majority of people in the UK (including virtually all who work in the private sector) will have some of their pension and/or savings invested in stock markets, both here and overseas.
Why did stock markets suddenly fall?
Essentially, because of fears of inflation and interest rate rises. Generally speaking, central banks believe that an inflation rate of between 2% and 3% per year is good for developed economies. The worries started when official figures showed that average wage rises in the US had reached 2.9%, prompting fears that prices would soon start to rise, meaning that higher interest rates would be needed to keep a lid on inflation. Investors then took flight at the prospect of the era of cheap money coming to an end – the US central bank has ‘scheduled’ three 0.25% interest rate rises for this year, but some experts are predicting that could rise to four or five rate increases. Ironically, the President’s moves to strengthen the US economy could lead to continuing stock market jitters.
First the US, then the rest of the world…
Falls in the US were quickly followed by falling markets around the world: why did that happen?
Many countries – especially in the developing world – have borrowed heavily in dollars, meaning that rising rates in the US will make servicing that debt more expensive. A booming US economy will suck in imports from those countries, increasing their incomes – but that won’t be good news for Europe. The Eurozone looks unlikely to increase rates in the short term, meaning that the euro could well rise against the dollar – making it harder for European countries to export to the US. Add in the fact that the world is now a very inter-connected place (at least as far as stock markets go) and you have the recipe for the worldwide falls that we saw at the start of the week.
Is it the beginning of a global crash?
In addition to the fall in stock markets, the cryptocurrency Bitcoin was also tumbling rapidly – falling around 11% in one day to touch $6,000 on Tuesday. That was the lowest level since last November and well off the recent highs of $20,000 as more banks stopped customers buying Bitcoin on their credit cards and the currency came under increased regulatory scrutiny.
With all this going on it was easy to believe that stock markets and financial markets around the world were heading for another crash: that we would shortly wake up to Black Wednesday/Thursday/Friday turmoil as markets crash worldwide.
It is always the bad days that capture the headlines. Some people reading this will remember ‘Black Monday’ in October 1987 when stock markets around the world crashed and the US Dow Jones index lost more than 20% of its value. Going even further back in time ‘Black Thursday’ was the day that marked the start of the Wall Street Crash and a worldwide recession: that day the US index fell by more than 12%.
In contrast. Monday of this week saw the Dow Jones down by 4.6% and – as we noted above – the FTSE decline by 3.5% first thing on Tuesday. But yesterday, the Dow Jones index recovered: despite the falls it is still higher than it was at the start of the year. As I write this (at 9:30 on Wednesday morning) the FTSE and the other major European indices are going back up.
It is a cliché, but saving and investing is a marathon, not a sprint. Like so many other things in life (marriage and bringing up children…) you are in it for the long term. So while fluctuations like those we saw this week make the headlines, you should always look at the long term. But ‘stock market quietly rises 30 points’ will never be news…