These notes begin with a word on the stock market figures quoted and was written very early on the morning of Friday 12th October. The levels quoted for European stock markets were correct at the close of business on Thursday 11th: the levels quoted for Far Eastern markets and America’s Dow Jones index were correct as at 6:30am on Friday 12th.

Inevitably, by the time you read these notes, the numbers will have changed: some markets will have gone up, others may have continued to slide. The essential principles, however, will not have changed – and we therefore hope that these notes go a long way to reassuring you, after what has been a volatile week on world stock markets.

What happened?

Anyone waking up on Thursday morning could not have failed to see the headlines:

Worries about global trade war send US and Asia stocks down sharply

And a few hours later…

Europe stock sharply down after global sell off

Concerns about the continuing trade war with China and rises in domestic interest rates had taken the US stock market lower: that in turn had led to stock market falls in Asia, and when the European markets started trading later in the day, they too saw a sharp sell-off.

Why did the US markets fall?

As usual, it was a combination of factors.

President Trump campaigned long and hard on a promise to keep American jobs and always threatened to impose tariffs on Chinese imports, which he saw as damaging to American jobs. Throughout this year, the lists of Chinese products on which tariffs of up to 25% have been imposed has grown and grown and – inevitably – Beijing has responded, in turn imposing tariffs on a range of US products, many of which are from the agricultural sector, a traditional supporter of a Republican President.

This week, though, the International Monetary Fund issued a gloomy forecast, saying that the trade war between the US and China risks making the world a “poorer and more dangerous place” as it lowered its forecast for global growth for both this year and next and warned that the trade war would put a “significant” dent in economic recovery.

Meanwhile in the US, the Federal Reserve (roughly the US equivalent of the Bank of England) had raised interest rates at the end of last month, taking them to a range of 2%-2.25%. With unemployment in the US at its lowest rate for nearly 50 years and wage growth at a nine year high, it is likely that the Fed will raise rates once more before the end of the year.

How bad was the damage to stock markets?

If we compare world stock markets on Thursday evening with their levels at the end of September, then several markets did show sharp falls.

Having ended September at 26,458, America’s Dow Jones index stood at 25,103 at 6pm yesterday (a fall of 5%) and ended the day at 25,053. In the Far East, China’s Shanghai Composite index was down 8% to 2,583 and the Japanese index was down 6% to 22,587. The markets in both Hong Kong and South Korea were down by 9%.

In Europe, the FTSE 100 index of leading shares closed Thursday at 7,007 – down 7% from the level at which it ended September – and Germany’s DAX index was down 6% at 11,539.
Translate these falls into monetary terms and headlines about ‘billions wiped off world stock markets’ become easy to write.

Putting it into perspective

The figures above – at first glance – look alarming. But today we live in a very inter-connected world. Many stocks are traded in more than one market, meaning that if they fall on Wall Street then they must, by definition, fall in Hong Kong. There is far more pre-programmed buying and selling than there used to be.

To put that simply, a computer programme in Asia might have an instruction to sell stocks in China or Japan if the American markets falls, say, 2% in a day. If the 2% barrier is breached then the stocks are sold: there is no human intervention. That happens increasingly: the old-style trader/fund manager who ‘has seen it all before and knows that the fundamentals haven’t changed’ has increasingly given way to the computer programme and the trading algorithm – and the effect is to exaggerate stock market movements.

The good news

Despite the volatility of the past week there is plenty of good news around. As we mentioned above, the unemployment and wage growth figures from the US are spectacular. The Federal Reserve may have reacted sharply – to the President’s evident displeasure – but to millions of working Americans, the figures are nothing but good news.

The Chinese economy continues to grow at more than 6% per annum – and drive growth in the rest of Asia – and in Europe, Germany produces a remorseless trade surplus every month, with a surplus of €17.2bn (£15bn) recorded for August.

There is also plenty of good news in the UK, despite the continuing uncertainty over Brexit. To give just one example from this week, the Spanish train company TALGO, which manufactures trains in 28 countries, has just shortlisted six sites for a new 40,000 square metre facility which will manufacture a new generation of trains and create 1,000 new jobs. All six of the shortlisted sites are in the UK, ranging from Chesterfield in Derbyshire to Longannet in Scotland.

Financial planning is for the long term

As we have said many times, your financial planning is for the long term. While the stock market movements of a single week can look dramatic, they are not significant over a 10 or 20 year time period.

What is important is that your financial planning continues to match your long-term goals and short-term fluctuations should not change that. Yes, of course the recent headlines have been worrying to wake up to – but remember that ‘American stocks crash’ is a headline. ‘American stocks fall but they are still significantly higher than a year ago’ is not a headline. (They are: when Donald Trump was inaugurated in January 2017 the Dow Jones index stood at 19,827. Even allowing for the recent falls it is up by 26% since then.)

On the morning of the 12th, markets in the Far East appear to have stabilised overnight. Both the FTSE and the German DAX index have opened up slightly. Nevertheless, I understand that our clients may have questions about this week’s events. If you would like those questions answering – or would like any further reassurance – then do not hesitate to get in touch with us.

Remember that we are never more than a phone call or an email away.