IT HAS BEEN a punishing 24 hours for the world’s stock markets.
Last night, the US Dow Jones reported its largest-ever single-day loss. That’s right, its largest-ever.
Other markets across the globe have responded, with the resultant snowball effect being felt across the board – Japan’s Nikkei index in particular has taken a proper battering.
As of this morning, all euro markets are down over 3%, although they appear to be recovering slightly as the morning progresses.
It has been the worst 24 hours of European trading since the Brexit vote of 2016, with the UK FTSE index down 250 points, as the sun came up, on the back of the chaos seen in Asia.
Meanwhile, Ireland’s own ISEQ index was down 1.9% after yesterday’s trading.
But with the recession of the last decade a receding memory, and Donald Trump telling anyone who’ll listen that the US economy is seeing landmark gains under his stewardship, why is everything seemingly suddenly falling apart? And should we be worried?
You probably don’t need to lose too much sleep
Firstly, you have to take into account that growing wages and a resurgent economy, which are being seen in industrialised nations around the world, are not necessarily what a stock market likes to see, in absolute terms.
Those two indicators suggest that the various financial stimulus measures, such as the EU’s programme of quantitative easing, put in place by governments and central banks across the globe to pull themselves out of the recession and encourage new growth, are having the desired effect.
And that means that they may (a) be taken away, and (b) could lead to interest hikes on the part of central banks, in order to get their economies on an even keel – non-stop growth being non-sustainable.
This leads to spooked investors, who fear volatility above all else, and the kind of snowball effect seen so dramatically in the past 24 hours.
However, that isn’t the end of the world – it’s not a sign of recession, or tanking economies. It makes more sense to see it as the various markets ‘correcting’ themselves after surges in growth that were not necessarily representative of reality.
So, you can see what’s happening, global investors are getting out while they’re ahead, as it were.
Good news / bad news
“Basically, good news regarding the performance of the global economy means bad news for stock markets,” said Conall MacCoille, analyst with Davy Stockbrokers.
“With the US wage market up 2.9% at the moment, then you have two separate PMI (Purchasing Managers’ Index) – measures by which analysts judge how an industry is doing – surveys in the past month.
“The main reason you’re seeing equity markets down is that people believe that the stimulus measures that had been put in place, such as quantitative easing, will now be taken away.”
So what’s been happening in the past day is a sort of pre-emptive strike on behalf of the markets, who want to cut their losses before ‘corrective’ punitive measures are put in place.
“It’s true that the Dow is down 4.6% in a day,” said MacCoille. “But it’s only down 1.8% overall for 2018, which isn’t quite so dramatic.”
One thing’s for sure, the US president’s reaction to the day of carnage will be interesting. The Dow Jones has grown by 5,000 points since Trump took office, and passed 20,000 for the first time in the aftermath of his election.
Yesterday it wiped out nearly its entire growth from 2018 and we suspect he may not be volunteering to take the blame.
“With the various stimulus programmes in place things were being over-valued, there were two interest hikes projected by the US Fed – the Treasury, which administers the American economy – for this year. If things had kept growing there would have been even more,” said MacCoille.
“And with interest rates at close to zero, investors couldn’t get a return on a bond. Equity values were very frothy over where they should have been. And that all led to a concern in the markets.”
MacCoille said that “you tend to get these corrections, it’s probably not a bad thing”.
“And it’s not a bank crash or anything like that.”
Written by Cianan Brennan and posted on TheJournal.ie