It is fair to say the last few weeks have been difficult for worldwide stock markets for various reasons. It is also fair to suggest that some investors have been looking for a “reason” to bank some profit and retreat to the sidelines. So, why are markets struggling and what does the future hold?
US stock market
In reality the US economy is performing much better than many people had expected. Indeed the Federal Reserve is currently in the middle of a programme of controlled interest rate rises to rein in inflation and over-exuberance by consumers. However, we have also seen some relatively disappointing figures from leading US companies which had been on a very strong growth path.
As we touched on in some of our recent articles, as the economy slows, sales growth will retreat yet, due to the lag of wage inflation, wages will continue to grow for some time to come. This means that slowing sales and increasing costs will hit many companies. Those who are likely to be hit hardest are companies which were forecast to grow at the highest rates. This has prompted some investors to bank some profits and wait for the next buying opportunity.
European stock markets
While Brexit continues to grab the headlines there is an even greater concern with the Italian government. The Italian government is adamant it will increase spending on public services to drag the economy back onto a growth path. This would be in direct contradiction of the EU’s policy on members spending which has led to a war of words and concerns that the cost of finance for the Italian government will continue to rise. Only today the Italian authorities were forced to confirm that they will “not be leaving the euro” despite some extremists suggesting this may be the case.
So, on one hand we have the continuing uncertainty surrounding Brexit as well as the loss of confidence in the Italian government and its proposed spending in the short to medium term. We saw contagion sweep through Europe after the US mortgage crisis brought about the worst economic downturn since the great depression. In reality, the Italian situation will be sorted out in the short term, but this has done nothing for the reputation of the European Union and its relationship with member states.
Low interest rate environment
Against the backdrop of falling markets, greater volatility and doom and gloom scenarios in the press, let’s not forget we are still in a relatively low interest rate environment. As a consequence, holding cash on deposit is not an option for the vast majority of investors, both private and institutional, so they will likely be looking to buy stocks on the dips. Any short to medium term economic downturn in Europe would impact the worldwide economy and act as a drag on the US economy at best. This may well postpone further expected short to medium term interest rate rises prompting more people out of cash and into stock markets and property investments.
While there is some talk of a crash in worldwide stock markets, these events tend to occur when you least expect them. Even talk of a crash in the short term should act as a brake, as we have seen recently, and blow the froth from markets, something which has formed over the last few years. Tech shares on relatively high valuations will be hit hardest and those with an eye for more speculative investments may find some interesting buying opportunities in the days and weeks ahead.