What has happened to the stock markets?

The FTSE 100 has dropped 10% since the highs of May. Wall Street suffered its biggest fall in 8 months last week, while European stock markets plunged to their lowest level in 20 months.

What is going on, and should you be worried?

Falling is just part of volatility

When the stock market is falling, it can be worrying when your money is falling with it. However, it’s important to realise that volatility is a normal part of stock market behaviour, and to understand the reasons behind it.

The reasons for the current drop in value of shares all around the world seem to be based in the US. The US economy is booming under President Trump’s tax cuts earlier this year. This has prompted the US central bank to raise interest rates to keep inflation under control, and bond prices have risen accordingly. The 10-year government bond yield has recently risen above 3.2%, its highest level since 2011.

Investors who can get a guaranteed return of 3.2% per year, risk-free are pulling out of riskier investments like shares. ‘Bond Proxies’, the blue-chip stocks that pay regular, dependable dividend streams are particularly likely to be hit, and the FTSE 100 is full of this type of high yielding dividend stocks. When people sell them off to replace them with real bonds the index will inevitably fall.

This may not be the whole story. The US interest rate hikes have meant higher interest costs, leading to lower profits for businesses with debts, which in turn means lower share prices. The FTSE 100 has many highly-leveraged companies, which have suffered in this way. Global stock markets and especially US stocks have enjoyed a strong run over the last few years, so an easing back was only to be expected.

There were also jitters over Trump’s trade war with China and Europe’s concerns about Italy and Brexit. These have caused the International Monetary Fund to downgrade its forecast for global growth and causing many investors to become more cautious.

But if the fall in share prices around the world is simply part of the way the market works, what can you do about it?

Don’t panic

It can be easy to react by selling when stocks are falling, but panic selling is almost always a mistake. Remember – you haven’t lost money until you sell. The chances are stocks will recover sooner or later. Investing is a long-term game with ups and downs along the way. In the last 30 years, markets have suffered at least three major meltdowns – but overall have delivered steady growth. Simply tracking the FTSE 100 and letting your money work for you tends to work out in the long term.

You could even see the market correction as an opportunity. Many stocks are now considerably cheaper than they have been recently. You might consider buying those sought-after blue chips while they are bargains.

Remember, a rising market is part of volatility too

Market contractions because of fear over rising interest rates are nothing new. Stock markets had a bad run over the same concerns in February, before rallying back towards record highs over the summer.

The fundamental strength of the US economy has not changed. That strength is likely to be confirmed in the next few weeks in third-quarter earnings updates.

The volatility that has seen shares fall could see them go right back up. But you might want some expert help to ensure that volatility can be an opportunity rather than a threat. At Continuum, we can help you set up a portfolio that is designed around your attitude to risk and which can take factors like current global volatility into account.

The value of investments can fall as well as rise and you may get back less than you invested.

Sources:

theguardian.com – Why are stock markets falling and how far will they go? – 11th October 2018