Stock market investors will have woken up this morning to the news that the long awaited correction following an extended period of solid gains and low volatility has arrived. International stock markets have been moving down since Friday, after a number of big technology and energy companies failed to hit earnings forecasts when publishing their quarterly reports. However, falls accelerated yesterday on Wall Street with the Dow Jones Industrial Average plummeting 4.6%, its biggest one day percentage decline since 2011. In terms of points it was the index’s biggest ever daily drop. The S&P 500 also shed 4.6% and the Nasdaq 3.8%.
Asian markets followed the example set in the USA on Tuesday and Japan’s Nikkei 225 lost 4.7%. The FTSE 100 opened 3.4% down on yesterday’s close but has since recovered somewhat and is currently slightly less than 2% down at lunchtime on Tuesday. Futures are currently suggesting the major Wall Street indices will open down another 1% to 1.5% today.
However, despite the fairly heavy losses those investing online in equities probably shouldn’t panic. While such corrections can lead to investors getting nervous, selling of more and deepening the tumble, the probability is the last couple of days are more a ‘pause for breath’ than the beginning of something more ominous. Quoted in The Times, Mark Haefele, global chief investment officer at UBS Wealth Management commented:
“The sharp market move should be put in context. The S&P 500 is still up 3.3 per cent year-to-date, after the best January since 1997”.
He went on to further say:
“And investors should remember that we are coming out of an exceptional environment. It has been more than 400 trading days since a greater than 5 per cent drawdown, the longest run since the 1950s.”
The main reason why markets are considered to be getting nervous should also provide some comfort to those investing online. The strength of the economy in the USA and in many other parts of the world is pushing inflation up and as a result, central banks, particularly the Federal Reserve, are expected to push interest rates up higher sooner than previously expected. This would be expected to reduce borrowing and also makes equities less attractive in comparison to fixed income alternatives such as bonds.
Company earnings are still generally very strong as is the wider global economy. US company valuations are high, though those in the UK, Europe and Asia less so. While it is not impossible the correction of the last fews days could start to feed itself and deepen, even were it to do so the fundamentals suggest this would be unlikely to be a long term trend or wider market crash.
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