World stock markets fall, why and how it effects you

Posted on February 9th, 2010 | Categories - Nottingham News

The FTSE has had a pretty miserable couple of weeks and despite recovering very slightly this week is 9% down since 11 January.

So what has happened?

A wave of bad news has seen the markets take fright and fall, in some cases  by large amounts.

Not only did markets fall but every indication usually associated with fear and risk aversion has seen sharp movements. The cost of insuring government debt spiked, the dollar rose, the price of metals, oil and most shares fell.

So what was the bad news?

A number of things, piled on top of each other, caused markets to fall.

Central banks particularly the Federal Reserve, the Bank of England and the European Central Bank are readying to withdraw some of their stimulus, for example the Bank of England signalled the end of Quantative Easing here in the UK last week. Markets are concerned that when this support is withdrawn corporate earnings alone will not be sufficient to prop up the market.

A further trigger was Greece and the revelation that its budget deficit is much higher than anyone thought, it is clear it will struggle to make the spending cuts it has promised. Although a small player the news from Greece seems to have had a knock on effect to other Southern European countries such as Spain and Portugal whose stock markets fell significantly last week.

Given the richer EU nations cannot afford to bail out all the poorer nations, it is understandable they have had to tell Greece it will have to sort out its own mess. But that has made markets nervous about what could go wrong and how far the problem could spread.

Further disappointing news came from China and there is a clear indication from Washington that the regulatory framework in which banks operate will be tightened.

Many analysts thought that the markets were already due a correction and these events along with data from the US and UK which showed just how fragile the recovery is seems to have started it.

How does it effect me?

Well, in the short term if your investments have any exposure to equities, whether they are in an ISA, Pension or an alternative the value is very likely to have fallen.

The question therefore is whether you should take any action and sell the investment, hold on in the expectation that the fall is short term and the investment will recover in value or indeed see the recent falls as a buying opportunity.

Much depends on your time frame, if you are investing for the long term for example via a pension for retirement, your investment should have time to recover from recent falls before you need to draw upon it. However if you are planning to use the investment in the short term and the value has fallen significantly over recent days your position is somewhat different and urgent attention should be paid to your portfolio, although this does not necessarily mean assets should be sold.

Indeed one of the golden rules of investment is to have patience and not to react to sudden market movements; further rules for investing can be found here:

10 Rules for successful long term investing

Many well respected people including top performing fund managers and strategists have been saying this is a temporary and expected setback that matches similar moves in previous bull markets.

In summary, review your portfolio, take independent advice, make a decision and then have faith.

What does the future hold?

There is a mixed view of how 2010 will pan out as economies struggle to lift themselves out of recession and cope with unprecedented debt levels and there is always the odd surprise, which is rarely good news, thrown in for good measure. Many believe that we are heading for a double dip in the markets.

Analysts believe that Greece will not be expected to fail and hopefully this problem will pass relatively quickly.

However companies have greater issues, improvements in corporate earnings, which in turn has lead to a rise in share prices, have come mainly from cutting costs rather than boosting turnover. In 2010 we are likely to see static earnings, which coupled with the inability to cut costs further, you would think that most businesses are as lean as they possibly can be, could lead to share prices falling.

Closer to home the period of time after the election will certainly see cuts in public expenditure and tax rises, the extent of these will depend on who forms the next government and the mandate that they receive, however they will certainly happen and will effect the fragile recovery to a greater or lesser degree.

Despite all this gloom the markets always have the potential to surprise us, who would have predicted the steady rise in share prices, which went almost unchecked from Spring last year until the recent problems.

Whatever happens in 2010 it will certainly be an interesting ride we seem to be on a downward section, but who knows what is round the corner.