It’s a little early for Halloween, but markets sure got spooked last week. After a 28-month ride to September highs, stock markets jolted and shook investors last week like the most dramatic and scream-inducing rollercoaster at an amusement park’s fright night.Despite the wild ride, by Friday’s close, FTSE 100 was down about 0.47 percent for the week.
Restoring some perspective
After a week like last week, it’s important to take a deep breath and cast a calm eye over current financial and economic circumstances. This can help restore perspective and ensure sound decision-making. Here are a few points to consider:
- Markets go through corrections: Last week’s drop didn’t quite meet the definition of a market correction, but it came close. It’s no secret stock market corrections can be unnerving but, as Kiplinger’s explained recently, “Corrections are an inevitable part of investing. Since 1932, declines of 10 percent to 20 percent (the traditional definition of a correction) have occurred an average of every two years, according to InvesTech Research.” Based on history, 10 percent corrections are normal and to be expected. It has been three years since our last correction.
- There is a lot happening in the world: ‘When it rains, it pours,’ as they say. A whole host of factors contributed to last week’s market volatility. Let’s take a brief look at some prominent concerns:
- Monetary policy adjustments in the United States. The Federal Reserve has been moving away from the highly accommodative monetary policies it has pursued in recent years and that has some investors worried. Quantitative easing is expected to end this month. The next step is raising the Fed funds rate which is expected to happen next year. Last week, St. Louis Fed President James Bullard reassured markets when he suggested, “The central bank should extend its asset-purchase program when policy makers meet later this month. U.S. stocks erased losses and Treasury yields rose on expectations the Fed will take action to insulate the United States from global economic weakness,” reported Bloomberg.
- Possible deflation in the Eurozone. It’s not here yet, but some Eurozone countries have fallen back into recession and the region is showing no growth. The European Central Bank reduced rates in June and September and is expected to begin a round of bond buying next week. These efforts may improve productivity and spur growth.
- The strengthening U.S. dollar could affect global liquidity. While a strong dollar has potential to slow growth in emerging countries, liquidity issues may be balanced out by the effect of falling oil prices. Reuters reported, “The falling oil price… will improve household budgets in the United States hugely – one study from Citi estimates the global windfall so far at $660 billion which includes a $600 per-household bonus in the United States.” More money in the pockets of consumers may translate into stronger emerging market economies.
- Slowing overseas economic growth. Slower growth in China is affecting markets around the world. Germany has experienced some economic weakness recently. Brazil is in recession. Economic growth is slow but steady and is not expected to change.
- The potential spread of Ebola. “This is a terrible human tragedy but Ebola’s transmission – through bodily fluids – appears to be more difficult than SARS… The cost will be high in human terms but, so far, there is nothing to suggest it won’t eventually be contained,” reported Barron’s.
- Political unrest and military conflicts persist. Ukraine, the Middle East, Hong Kong, and other regions of the world are embroiled in conflict. Unrest often impedes economic growth.
When you add to the mix human emotion and anxiety that has lingered since the financial crisis, you create the potential for a week like the one we just had.