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Why Did World Stock Markets Dip This Week

Why Did World Stock Markets Dip This Week …. But Why Investors Shouldn’t Panic

The global stock markets have been doing nicely over recent years, with many global indices at or close to record highs, meaning investors have been enjoying good returns. So the recent dips in the markets came as a bit of a shock to many investors, to say nothing of many experts.

The stock market dip started in the US last Friday, with a taster of what was in store. Then on Monday the Dow Jones Industrial Average fell by 1,500 points, its worst ever during a day’s trading, although it subsequently rallied and still remained 20% up over the year.

Later, European and Asian markets were also affected. In the UK, the FTSE 100 suffered its largest fall since the Brexit vote in 2016, with £50bn being wiped off the value of the market.

But let’s take a look at a few facts that suggest investors perhaps shouldn’t panic.

Firstly, unlike the market crashes in recent history – such as the ‘dot.com’ crash or 2007 financial crisis – the latest dip wasn’t caused by an single cataclysmic event.

Instead, it was caused by a combination of several quite small factors. Commentators suggest that recent announcements on the US inflation rate, earnings figures and particularly hints of an interest rate rise – or more particularly uncertainty at when they might rise – combined to create nervousness in the markets.

Some experts even put it down to investors and traders getting a little ‘over excited’ at the normal functioning of the market due to being unaccustomed to a little volatility after a long period of stable growth.

And, the fact is, many fundamentals still point towards further buoyancy in the markets: The world economy overall is growing …. especially the all-important US economy which has been growing consistently in recent years. In the US, unemployment is falling,  wages are rising, consumer confidence is booming, company profits are forging ahead, while the Trump tax cuts (although perhaps adding to the uncertainty) will likely provide further stimulus.

Elsewhere, in continental Europe, the economic recovery is still in its quite early days. There it is likely to run much longer, supporting the markets as it does.

Some say the US market is overvalued, but the statistics don’t entirely support this. For example, the price-to-earnings (P/E) ratio for the S&P 500 is high but probably not that high – and nowhere near that prior to previous crashes. Many commentators describe the US market as ‘frothy’. But, traditionally ‘frothy’ markets only lead to minor corrections rather than crashes. Indeed corrections traditionally tempt more investors into the market in search of opportunities, and so help to bolster it.

So, while it is quite likely that there will be further volatility in the weeks ahead – as evidenced by events over the last few days – well informed and advised investors shouldn’t have much reason to panic. If anything it underlines the importance of diversification and correct asset allocation, and of taking advantage of expert financial and investment advice.

 

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