Why The Stockmarket Fell Last Week

Why The Stockmarket Fell Last Week
Palau by Julian Cohen. Why?

The FTSE 100 fell 2% on 23 May 2013, so was it a blip or is there more to come?

Well, slide continues.

Yesterday, It Was Down 4.6% From Its High On 23 May (from 6,840 to 6,525)

You'd be forgiven for thinking the falls were down to me. After all, on 22 May, I posted an article entitled Sell In May And Go Away.

The fact is I don't have inside knowledge. Nor am I some incredible investment guru.

Here's the point.

It's just the nature of stockmarkets. They go up. And they come down. And often the movements are quite dramatic.

So what's happening and should you be worried if you have stockmarket investments?

It All Came To A Grinding Halt Last Week

Ben Bernanke, head of the US Federal Reserve discussed how the central bank was considering cutting back on the emergency support it had provided the US economy and the stockmarket since 2009.  Although he stressed this would only happen if the US economy continues to grow, the markets reacted badly.

The expression “when America sneezes, the rest of the world catches a cold” never seemed more relevant.

The support policy, known as quantitative easing, or ‘printing money’ as the case may be, is the primary reason why the world’s stockmarkets have soared in the last nine months.  Investors are simply worried how the markets will cope without that support.

Their concern was heightened by a report from China showing manufacturing had fallen for the first time in seven months.  This increased fears that recession in Europe was contributing to China’s slowdown, which inevitably would affect the rest of the world.

The UK’s falls of 2% were matched in Europe and the US.  Japan, however, crashed 7%, although it recovered a bit the following day.

Are These Falls Significant?

At the moment, not really.  Stockmarket falls of 2% occur regularly, particularly after periods of spectacular growth, which has been the position this year. 

Falls like this can sound worrying.  Certainly, some investors panicked and others took profits. But in reality, it only saw the market return to its position of two weeks earlier.

After such incredibly strong growth, some investors had clearly become worried that markets had overshot themselves.  Some were hoping for a correction to take some of the heat away. 

Do Last Week’s Fall Represent A Correction?

No-one knows!

A quick look around the city commentary reveals that some firms, like Franklin Templeton, continue to believe stocks around the world are priced low.  Others, like Signia Wealth, believe investors became ‘exhausted’ by the rally and the fall in the market is healthy, with further falls expected to allow the real economy to catch up.

It’s fair to say the global economy is gradually recovering from the financial crisis.  But debt continues to worry central bankers and policymakers, which could lead to a deflationary slump.  This is the horrendous condition when the price of goods falls and no one buys anything, believing it will be cheaper to buy later.

Central banks respond by printing more money.  This lowers interest rates, which should make people more confident about the future.  It makes bonds more expensive, which encourages investors to buy shares as a way to get a real return above inflation.

The problem is that it’s an artificial situation, and the stockmarkets have become significantly distorted as a result.  No one knows when the time is right to stop the policy and repay the debt, leaving the world’s economies to survive without support.

Which Way The Stockmarkets Will Go On Any Particular Day Is Largely Guesswork

It’s not just about the underlying strength and success of the businesses in which you own shares.  The markets are incredibly susceptible to both good and bad news. 

Who’d have thought the comments made by one man could have seen trillions of pounds obliterated around the world.  Talk is definitely not cheap!

Whilst stockmarkets are a place to make money, they are a place to lose money too. And the one thing you can say for certain, it’ll remain a bumpy ride for some considerable time to come. 

If you don't like the idea your money is struggling to survive in the turbulent seas that are the world's stockmarkets, maybe you should consider the calmer waters of property-backed investments in which you can earn as much as 15% per year without the volatility.

So if your ‘self-invested’ pension fund holds stockmarket investments, make sure you keep a close eye on it.  For next time you look, it might be worth a whole lot less.  And as your retirement income will depend on it, you’ll only have yourself to blame if you don’t have enough for “life’s longest holiday”!

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